Proposals for conversion of ultra long leases

The latest offering from the Scottish Law Commission is their Report on Conversion of Long Leases into ownership, which follows on from a draft Discussion Paper on the subject, published in 2001. The main proposal is that a Conversion Scheme should be introduced for ultra-long leases, which would convert the tenant's interest into absolute ownership.

The background for the proposals is similar to the background of the reform of the feudal system. An ultra-long lease suffers from many of the disadvantages already familiar from feus. In most cases the landlord has little or no real interest in the land, in which case, it is inappropriate for the landlord to exercise any measure of control over the land. Key components of the scheme would be:

  • It would follow closely the scheme for conversion of feus introduced by the Abolition of Feudal Tenure Etc (Scotland) Act 2000;
  • The scheme would be compulsory and automatic but with the possibility of an opt-out by the tenant;
  • A lease would qualify if it had been granted for more than 175 years and if there was still more than 100 years left to run;
  • On a specified day, all ultra-long leases would be converted into ownership and the residual ownership of the landlord would be extinguished;
  • Certain types of lease conditions will automatically survive and others can be preserved;
  • The former landlord would be entitled to compensation, calculated as a multiplier of the rent, and in some cases additional compensation would be due;
  • Conversion could be prevented if the tenant registered a notice of exemption before the date on which the legislation comes into force, but this could be recalled at any time by the tenant provided the lease had more than 100 years to run.

What types of Leases will Qualify?

The proposal is to abolish leases where the tenant's interest amounts to "virtual ownership" because of the long length of the lease and the lack of any "real" interest in the land by the landlord. Only leases where the initial grant was for more than 175 years and the unexpired term is more than 100 years would qualify for conversion, and any renewal period which the landlord is bound to grant and the duration of any other lease which is to run consecutively with the current lease would be included. Any provision enabling early termination would be disregarded. There would be provisions dealing with any reference to the lifetime of a tenant.

A lease would only qualify for conversion if it has been registered but provision is made for conversion of a lease becoming registered after the legislation is in force by way of service and registration of a notice of recall.

Are there any Exemptions?

It is proposed that minerals leases and leases of property which cannot be owned separately from the land (such as leases of shootings or freshwater fishings) should be exempted from the Conversion Scheme.

Conversion will be compulsory, but a tenant will be able to opt out of conversion, by registering a notice of exemption at least two months before the legislation takes effect. It is expected that a tenant might to do this, for example, in cases where the amount of compensation would be considerably large (due to the level of rent or, for example, if there is value in the Landlord's reversionary interest or the lease contains conditions designed to reserve development value). In such cases it may be preferable for the tenant to remain as tenant and continue to pay the rent over the remaining period of the lease. However it will be possible to recall the notice if lease still has more than 100 years to run, since a future tenant might want the lease converted into ownership and be prepared to pay the compensatory payment.

What will be the Effect of Conversion?

All qualifying leases would convert on a single appointed day into the real right of ownership. The Report suggests a gap of say two years between the passing of the legislation and the appointed day to give landlords time to serve notices where appropriate, and for tenants to opt out if they wish. No disposition or other deed of transfer would be required.

Existing subordinate real rights such as servitudes, real burdens and public rights of way, which affect how the land is occupied and used, would remain in place. A fixed charge (Standard Security) over the lease would survive and would become a Standard Security over the land.

However, a Standard Security granted by the former owner over the land would, on conversion of the lease into ownership, disappear, although the personal obligation by the previous owner would continue.

Compensation will be payable

The issue of compensation for losses incurred by the former owner of the land is covered in some detail in the Report, and include provisions in relation to loss of rent, since on conversion into ownership, rent would cease to be due and the (former) landlord is entitled to be compensated for the loss of income.

In practice most rents are likely to be small and the amount of compensation proposed for loss of rent, or for loss of any renewal premiums up to £100, is calculated on the same basis as feuduty redemption and compensation payments figures, with reference to the price of Consolidated Stock. This worked out at a multiplier of approximately 20 for feuduty payments.

Landlords will have a period of two years after the relevant appointed day in which to claim compensation and if the amount claimed is greater than £500, then a preliminary notice must be issued at least 6 months before the appointed day to allow the tenant sufficient time to register a notice to opt out, if it chooses.

Landlords may be entitled to an additional compensatory payment, for loss of non-monetary rents, loss of the right to a rent review or other rent increase, loss of renewal premiums over £100, loss of residual value of reversionary interest, loss of the right to early termination, or loss of the right to development value, provided they serve an appropriate notice (and a preliminary notice if the amount is over £500).

What will happen to other Leasehold Conditions?

Conditions which are peculiar to leases, such as restrictions on assignation or sub letting, or provisions about surrendering the property on the expiry of the lease, have no place once a lease has been converted to ownership and so would not survive the process of conversion.

There is a distinction between conditions which bind successors of the landlord and/or the tenant and those which do not. The latter – contractual obligations pure and simple – will be left untouched by the legislation.

Conditions which do bind successors will be extinguished unless they can fall into one of the saving categories of Servitudes; Real Burdens or Sporting Rights.

Servitudes

Following conversion, ownership of the land will be subject to or include such servitudes as would exist if the lease had been a conveyance of ownership, which would include any rights expressly given in the lease, and also rights which were not expressly provided for in the lease but implied.

Real Burdens

Certain conditions may be capable of surviving conversion as real burdens if they comply with the constitutive requirements for real burdens, and fall into one of the statutory categories capable of conversion. These follow closely the equivalent categories for survival of feudal burdens. In some cases, conversion will be automatic, and in others it will be necessary to register an appropriate notice in the property register to preserve the condition.

Conditions which will survive automatically are: Facility burdens which regulate the maintenance, management, reinstatement or use of a facility such as a shared area or a private road; and Service burdens which concern the provision of services from one property to another.

The Report also refers to Manager burdens which confer a power of management over a group of related properties, with the provision that manager burdens would expire 5 years after registration of the lease, echoing the similar arrangement for title conditions of this type. However, given that it has not been competent since June 2000 to grant a lease of more than 175 years, this proposal in its current form is not likely to affect any qualifying leases, and this point will no doubt be addressed further before the legislation is finalised.

Preservation by registration of a notice registered in the property register will be possible for conditions which constitute certain types of personal real burdens (created by the Title Conditions (Scotland) Act 2003), namely Conservation burdens, which can be preserved in favour of a "conservation body" or the Scottish Ministers; Personal Pre-emption Burdens and Personal Redemption Burdens; Economic Development Burdens, which could be preserved in favour of the Scottish Ministers or the relevant local authority and Health Care Burdens, which could be preserved in favour of the Scottish Ministers.

Similar to the approach with some feudal burdens, it will also be possible for a landlord to nominate other property owned by him as the benefited property in respect of a leasehold condition if his property contains a permanent building used as a place of human habitation or resort and lies within 100 metres of the leasehold property; or the landlord and tenant can agree to convert any qualifying leasehold conditions into real burdens.

Sporting Rights

The reservation by a landlord of a right to take game from or fish for freshwater fish from leasehold property could be converted into a separate interest in land by registration of a notice in the property register.

Rights in Favour of Third Parties

If a leasehold condition is specified in the lease as being enforceable by parties other than the landlord or tenant then it would automatically be converted into a real burden. Similarly a leasehold condition imposed under a common scheme on a group of related properties (e.g. flats in the same tenement) would become a real burden automatically, and in cases where a leasehold condition was imposed in a partial assignation of the lease, the assignor or his successors could continue to enforce the condition by registration of a notice in the relevant property register.

How will the proposals affect landlords, tenants and prospective purchasers?

Automatic conversion of leases into ownership will have implications for the Land Register, as the former landlord will cease to be owner of the land and the tenant will become owner. It will not be practicable for the Register to be instantaneously updated when the legislation comes into force, and therefore for a period of time it will not accurately reflect the post-conversion position as to ownership, although the existence of an extant ultra long lease on the Register will denote that conversion will have occurred, unless the tenant has opted out.

Former landlords will have no further interest in the land and their only entitlement will be to compensation for loss. The person who is the tenant on the date of conversion of the lease will be the party liable to pay compensation.

The conversion of a qualifying lease into a right of ownership will be exempt from SDLT.

There is no indication of when, or the extent to which the Scottish Executive will introduce the proposals to Parliament, although since they fall within the larger context of land reform already enacted (the Abolition of Feudal Tenure, etc. (Scotland) Act 2000 and the Title Conditions (Scotland) Act 2003), and are entirely complimentary to those provisions, it seems likely that the proposals, whenever there is parliamentary will to include them in the legislative programme, will meet with general parliamentary support, and although stakeholders will have an opportunity to make their views known during the parliamentary process, it is unlikely that once introduced, the concept would be abandoned in its entirety.