You go to sleep one evening owning a piece of land. When you wake up the next morning you've lost your title to your tenant. Not a bad dream, but just (for the most part) the rationalisation of something which is overdue and will happen in a few years time.
On 28 November 2015, in terms of The Long Leases (Scotland) Act 2102 ("Act"), the tenants' interests in some Scottish long leasehold titles will convert into ownership interests and the interests of the existing land owners will be extinguished.
The Act will also operate to extinguish the interest of tenants under any leases superior to the leases which convert to ownership.
Those whose interests are extinguished will be entitled to claim (limited) compensation.
Leases which might be affected
The only leases which could potentially be affected by the Act are those:-
- whose original duration or term was more than 175 years and
- which still have more than 175 years left to run on the appointed day (for commercial property) or more than 100 years (for residential property) and
- with an annual rent of £100 or less.
Since 28 November 2004 it has not been competent to enter into a lease of Scottish property for more than 175 years (unless it was a sub lease granted out of an existing lease of longer duration). The Act is therefore unlikely to apply to leases entered into after November 2004.
The Act is not intended to convert or extinguish leases with a commercial rent – hence the £100 rent limit.
Further, none of the following leases can convert:-
- leases only of minerals (or which include minerals, with a royalty for exploitation)
- leases which are for the purpose of allowing installation and maintenance of pipes or cables and
- leases of (or which include) a harbour, in respect of which there is a harbour authority.
The appointed day will be 28 November 2015. This is the date on which such conversion of leasehold titles to ownership, and extinguishing of other interests, takes place.
The two year time lag gives plenty of time for service of any notices in relation to preserving title conditions and advance warning in respect of any compensation exceeding £500 and for tenants to consider whether or not to opt out of conversion.
Tenant right to opt out of conversion
Conversion to ownership, of a lease which qualifies, is not compulsory. The tenant (not the landlord) is entitled to opt out – provided that it does so at least 2 months before the appointed day.
Most tenants will be happy for their interests to convert, but the ability to opt out is included e.g. in case any do not wish to pay the compensation due to the (former) landlord.
Once a tenant has opted out it does have the ability to opt back in, by serving a "recall notice". This can be done at any time (before or after the appointed day).
If the notice is served more than 6 months before the appointed day, then the lease will still convert on the appointed day. If that notice is served within the 6 months before the appointed day, or on or after it, then the "appointed day" is, for that property, deferred to the first 28 November occurring 6 months or more after service of the recall notice.
Chain of leases for one property
In some cases there will be more than one lease of a property. Only the lowest lease in the chain will convert to ownership.
- A may have let a property to B for 999 years and B may then have let that property to C for 998 years. In that case C's interest will convert to ownership, and the interests of both A (as owner) and B (as intermediate tenant) will be extinguished.
- A may have let a 10 acre property to B for 999 years and B may then have let 4 of those acres to C for 998 years. In that case C is the lowest tenant in respect of the 4 acres and B is the lowest tenant in respect of the remaining 6 acres. C will become owner of the 4 acres, B will become owner of the 6 acres, A's interest will be extinguished and B's lease interest in the 4 acres will be extinguished.
If a lease converts to ownership then those whose interests are extinguished as a result (ie the land owner and any tenant under a superior lease) can claim compensation from the relevant former tenant.
There are two types of compensation: compensatory payment (which can always be claimed) and additional payment (which may apply in some cases).
- The compensatory payment is for loss of monetary rent, based on the capitalised value of the annual monetary rent under the relevant lease, but also takes into account any premium which might have been paid for a lease renewal.
At its simplest, where there is no obligation on the landlord to renew, the payment will be the amount of money which would, if invested in 2.5% Consolidated Stock at the middle market price at the close of business last preceding the appointed day, produce a sum equal to the annual rent.
As a rough guide, on the basis of recent figures, it is thought that the compensation due for a lease whose annual rent was £20 would be in the region of £500 - £600.
- The additional payment is only due in certain circumstances. It relates to the loss of certain rights under the lease (if these are applicable), which include loss of right to receive any non-monetary rent, or any rent which would have been variable or subject to review, or to receive a premium or an ability to terminate the lease before expiry which would have been exercisable within 200 years of the appointed day.
Claims for compensation can be made up to 2 years after the appointed day. However if the estimated compensation (under either category) exceeds £500, then a notice must have been served on the tenant not later than six months before the appointed day. If no such notice was served the compensation is capped at £500.
Burdens and servitudes affecting the Converted Title
The ownership interest which arises from the conversion of such a long lease is not the existing owner's interest – it is a new ownership created by statute ("Converted Title"). It will however still be subject to any real burdens or servitudes which burdened or benefited the previous owner's interest.
The Converted Title will also be subject to, or have the benefit of, new burdens and servitudes which are converted from former lease conditions. Some convert automatically and others require action on the part of the person who seeks to enforce them.
The categories are very similar to those which applied at feudal abolition when former feudal titles converted to absolute ownership, and the superiority interests were extinguished.
Any fixed charge over the lease interest which converted to ownership will remain in place, secured over the Converted Title.
However any fixed charge over the previous owner's interest, or over the tenant's interests in any superior leases which are extinguished, will fall. The debt obligation will remain but there will be no security over the property.
The Act's provisions only affect rights and obligations which benefit or bind successors – they do not apply to any provisions which were personal. Such personal rights will remain enforceable as contracts.
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