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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Conversion of Long Leases (Report) [2006] SLC 204(8) (December 2006)
URL: http://www.bailii.org/scot/other/SLC/Report/2006/204(8).html
Cite as: [2006] SLC 204(8)
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PART 8: MISCELLANEOUS TOPICS
Updating the Land Register
8.1 Automatic conversion has obvious implications for the Land Register. Until the appointed day the landlord is owner of the land. On or after that day, the tenant is owner, and the lease itself is extinguished. The change occurs by force of statute, without registration; and until the Register catches up it will be inaccurate. On consultation it was accepted that some legislative assistance to the Keeper is required, as it was required under the 2000 Act.[1]
8.2 In the first place, it needs to be made clear that the Keeper has the power to make the necessary changes to the Register. These changes are likely to involve (i) altering the status of the title sheet from leasehold to ownership; (ii) deleting from the burdens section the conditions of the lease other than those converted into real burdens by registered notice or by statute;[2] (iii) adding to the burdens section any real burdens or servitudes which are registered (or recorded) under the title of the landlord and affect the land;[3] (iv) deleting the title sheet (if there is one) of the current owner (ie the head landlord); and (v) deleting the title sheets of any intermediate tenants. Normally rectification is prevented where it is to the prejudice of a proprietor in possession;[4] and while it is arguable that any prejudice to such a proprietor would be caused by the conversion legislation rather than by the consequential rectification, it seems as well to put the position beyond doubt by giving the Keeper express power to rectify.
8.3 In the second place, it is necessary to allow for the possibility of error. A mistake made by the Keeper in the course of the changes described above should be capable of being corrected; and again the necessary rectification should be allowed without regard to the position of a proprietor in possession. However, that proprietor should have the protection of the rule from the 2000 Act which prevents rectification to the effect of reinstating encumbrances which have been deleted in error.[5] So if the Keeper retains a leasehold condition which ought to have been removed, he is free to remove it by a further process of rectification; but if he removes a condition in error, it cannot thereafter be reinstated, and the remedy of the (former) holder of the right is to claim indemnity from the Keeper.[6]
8.4 Next there is the issue of indemnity. Usually a person who suffers loss as result of rectification is entitled to indemnity.[7] But there would be little point in giving power to rectify if the Keeper was then made liable for payment of indemnity.[8] Hence indemnity requires to be excluded. It should be emphasised that this withdrawal of indemnity is confined to certain transitional changes arising out of leasehold conversion and does not affect other matters involving the title.
41. (a) It should be made clear –
(i) that any rectification of the Land Register which is required to take account of the legislation on leasehold conversion, or of anything done under or by virtue of that legislation, is not to be regarded as prejudicing any proprietor in possession, and
(ii) that there is no entitlement to indemnity under section 12 of the Land Registration (Scotland) Act 1979 as a result of any such rectification.
(b) But paragraph (a) should not apply insofar as the rectification involves the reinstatement of an encumbrance which was previously deleted.
(Draft Bill s 67, sched 21, para 2(4))
8.7 Thus far our recommendations follow closely the scheme laid down by the 2000 Act. But we propose one departure. Under the 2000 Act the alterations to the Register are, in effect, to occur in two distinct phases. First, dominium utile is upgraded to ownership and superiority title sheets are deleted; and secondly, those real burdens which do not survive abolition are deleted. Section 46 delays the second phase for some years after the appointed day, partly in recognition of the difficulty of the task to be performed.[9] In leasehold conversion, there are no real burdens to be evaluated and deleted.[10] Rather there are leasehold conditions which, necessarily, fall with the lease itself. They could not sensibly be left on the Register until some later exercise. It is true that a small number of those conditions may be converted into real burdens under proposals set out in part 4, but by comparison with feudal abolition these should be easy to identify. This suggests that an equivalent of section 46 is neither desirable nor necessary. Instead we suggest that all changes to the Register be made at the same time, and as soon as is reasonably practicable after the appointed day. No special legislative provision is needed.
Notices: evaluation for registration
8.9 Our proposals involve the registration of a number of different notices. Usually these have the purpose of turning leasehold conditions into real burdens,[11] but notices are also required for opting out of conversion altogether (and for opting back in),[12] as well as for preserving sporting rights.[13] In addition, section 14 of the draft bill provides for the registration of an agreement between landlord and tenant converting conditions into real burdens.
8.10 It cannot be assumed that the Keeper will accept all notices (or agreements) presented for registration. There is a power to reject documents, both in the Land Register[14] and, to a more limited extent, in the Register of Sasines.[15] In relation to the latter, the Keeper's concern is confined to whether the deed presented for recording is of a type appropriate to the register and whether it is formally valid. It follows that a notice is likely to be accepted for recording without further inquiry provided that it is signed and all the relevant parts appear to be completed. Land Register practice is different. In the interests of maintaining the accuracy of the Register, all deeds are carefully examined. If necessary the Keeper calls for further information or evidence. A notice would be rejected if the Keeper was not satisfied as to its validity.[16]
• whether a copy of the notice has been duly served;[17]
• whether, in the case of a notice or agreement converting leasehold conditions into real burdens, the conditions were enforceable by the landlord (or other sender);
• whether, in the case of such a notice or agreement, the conditions were still enforceable immediately before the appointed day;
• whether, in the case of a notice nominating a benefited property, the requirement of a building within 100 metres of the burdened property has been met;[18]
• whether, in a case where the 100 metres requirement has been dispensed with by the Lands Tribunal, the order of the Tribunal was preceded by an attempt by the parties to reach agreement;[19]
• whether, in the case of an agreement converting leasehold conditions into real burdens, a preliminary notice has been served;[20]
• whether, in the case of a notice converting a leasehold condition into an economic development burden or health care burden, the requirement that the condition was imposed for the purpose of promoting economic development or the provision of facilities for health care was met,[21]
• whether, in the case of a notice converting a sporting right into a separate tenement, the sporting right was still enforceable immediately before the appointed day.[22]
Following the 2000 Act,[23] it should be made clear that the Keeper has no duty in relation to these matters. Other checks exist. The landlord or other person signing the notice is on oath to tell the truth.[24] The person on whom the notice is served may be expected to read it over and will be in a much better position than the Keeper to check the information which it contains. A defective notice may be challenged.[25]
8.12 In the event that registration is refused, the applicant may choose to litigate the refusal, either in the Lands Tribunal[26] or the ordinary courts.[27] Since a notice or agreement must normally be registered before the appointed day,[28] special provision is needed for late registration in the event that the litigation is successful but does not finish until after that day. Following the 2000 Act,[29] we suggest that late registration should be permissible provided that it takes place within two months of judicial determination. In the interests of longer-term certainty, Scottish Ministers would be able to prescribe a final date after which registration would cease to be possible.[30] The registration would be backdated to the appointed day.
8.13 We recommend that
42. (a) The Keeper should not be required to verify –
(i) that a copy of the notice has been duly served;
(ii) that, in the case of a notice under recommendations 17(c) to (g), or 18, or an agreement under recommendation 19, the conditions to be converted were enforceable by the landlord (or other person sending the notice);
(iii) that, in the case of such a notice or agreement, the conditions were still enforceable immediately before the appointed day;
(iv) that, in the case of a notice under recommendation 18, the benefited property contains a permanent building used as a place of human habitation and resort and lying within 100 metres of the burdened property;
(v) that, in a case where the 100 metres requirement was dispensed with by the Lands Tribunal under recommendation 18(d)(iii), the order of the Tribunal was preceded by an attempt to reach agreement under recommendation 19;
(vi) that, in the case of an agreement under recommendation 19, a preliminary notice was served in accordance with recommendation 19(a);
(vii) that, in the case of a notice under recommendation 17(f) and 17(g) the conditions to be converted were imposed respectively for the purpose of promoting economic development or the provision of facilities for health care; and
(viii) that, in the case of a notice under recommendation 27 that the sporting right was still enforceable immediately before the appointed day.
(b) Where a notice or agreement submitted for registration is rejected by the Keeper but is subsequently determined by the court or the Lands Tribunal to be registrable, it should be possible to register the notice or agreement late, but not later than –
(i) two months after the determination, or
(ii) such date as Scottish Ministers may prescribe
whichever occurs first.
(Draft Bill ss 63, 65)
Unregistered leases
8.14 The statutory facility to register leases dates only from 1857;[31] and while most leases granted before that year have found their way on to the register there may be some cases in which an ultra-long lease remains unregistered. If so, the numbers are likely to be very small. In practice an unregistered lease could not be used as security for a loan,[32] so that a person who wishes to use the property as a security for a loan cannot avoid registration. Further, now that the whole country is operational for the purposes of the Land Register,[33] all future assignations require to be registered if they are to confer a real right.[34] This means that, within a fairly short time, most remaining unregistered leases will find their way on to the register. If, however, a lease remained unregistered on the appointed day it would be excluded from conversion, for it is a fundamental, and sound, principle of Scots law that ownership of land cannot be acquired without registration. Instead conversion should not occur unless or until the lease is first registered.[35]
8.15 In the discussion paper we suggested that registration should of itself be the trigger for conversion. The day on which the lease was first registered would be the appointed day for that lease, and hence the day on which conversion took place.[36] On further reflection, and following consultation, we accept the need for a mechanism for informing the landlord. A landlord should not lose ownership without being told of the fact, or being given an opportunity to serve and register the notices needed for conversion of conditions into real burdens and for preservation of sporting rights. In view of the very small numbers involved, the simplest approach would be to make use of the rules already recommended for the recall of exemptions.[37] The mechanism would work as follows. If a lease was registered for the first time only after the appointed day, it would be treated as a qualifying lease which had been exempted from conversion. That exemption could then be recalled by registration by the tenant of a notice of recall, in the usual way. Registration would be preceded by service of the notice on the immediate landlord and on the landlord under any superior lease. The appointed day for the purposes of conversion would then be the first Whitsunday or Martinmas occurring at least six months after the day of registration. Until the appointed day (as so defined) the landlord would be able to register the usual notices, and after that day he would have a further two years in which to claim compensation.[38]
8.16 The rule will be the same for a lease registered in the year before the (standard) appointed day.[39] Such a lease will be treated as a lease which has been exempted from conversion. This will give the landlord the opportunity to serve and register notices should a notice of recall be registered.
8.17 It may occasionally happen that an unregistered lease is a sublease and that the head lease itself is registered. Where the sublease was not registered on the (standard) appointed day the head lease would be converted into ownership on that day, as the lowest lease then qualifying,[40] but that ownership would be potentially defeasible on registration of the sublease. Where the sublease was registered in the year before the appointed day the normal rules will apply and the headlease will not be converted on that day.
8.18 We recommend that
43. Where –
(i) on the day falling one year before the appointed day a lease would qualify for conversion but for the fact that it has not been registered; and
(ii) registration subsequently takes place
the lease should be treated as a qualifying lease which has been exempted from conversion and accordingly the exemption should be capable of recall under recommendation 40.
(Draft Bill s 55)
Stamp Duty Land Tax
8.19 Stamp Duty Land Tax is a tax on "land transactions".[41] A land transaction means any "acquisition" of a "chargeable interest", no matter how the acquisition is effected.[42] Acquisition involves the creation, surrender, release or variation of a chargeable interest.[43] A chargeable interest includes an "estate, interest, right or power in or over land" other than an "exempt interest".[44] A land transaction is exempt from charge if there is no "chargeable consideration" for the transaction.[45] A person acquiring a "major interest" in land[46] has a duty to notify the transaction to HM Revenue & Customs within 30 days of the effective date of the transaction[47] unless the transaction is exempt from charge[48] or in the case of residential property the chargeable consideration is less than £1,000.[49] The percentage due falls to zero where the consideration is £125,000 or less in the case of residential property and £150,000 in the case of other properties.[50]
8.21 Ownership of land is a "chargeable interest". But whether it would be deemed to have been acquired at the point of conversion is more open to question. On conversion the right of lease of the land is simply replaced by a virtually identical right to ownership of the land. In substance what is happening is not so much an acquisition of a new right as the mutation of an existing one.[51] As against this it can be noted that in English law a chargeable interest is acquired where an enlargement of the residue of a long lease into a fee simple takes place in terms of section 153(7) of the Law of Property Act 1925.[52] Enlargement under the 1925 Act is not dissimilar to conversion to ownership under our scheme and it makes no difference that enlargement is voluntary while conversion is compulsory.[53] Given also that the policy intention of the legislation is to tax transactions relating to land it is reasonable to conclude that conversion of a qualifying lease to ownership probably amounts to an acquisition, so that in turn conversion is a land transaction.
8.22 In our view conversion also involves a chargeable consideration. A chargeable consideration is defined as any consideration in money or money's worth given for the subject-matter of the transaction, directly or indirectly.[54] Under the conversion scheme a landlord is entitled to claim compensation, calculated as a multiplier of the rent, for the loss of the landlord's interest. Where the compensatory payment is not a sufficient measure of the landlord's loss the landlord may in certain circumstances claim an additional payment by way of compensation.[55] As already noted, in practice most or all cases would fall into the zero rate band, so that nothing will be due, but that would not obviate the notification requirement.
8.23 As a matter of policy, however, we consider that conversion should be treated as a land transaction that is exempt from charge, and so not notifiable. Under the present legislation a lessee of residential property could normally rely on the exemption where the consideration is less than £1000.[56] But this exemption, which was designed to resolve difficulties that had arisen in England, applies only to residential property. The conversion scheme requires a solution for Scotland which extends to all leases converted under the scheme. The effect of the proposed exemption would be to take leases which will be converted to ownership out of the scheme for Stamp Duty Land Tax. There would thus be no requirement to notify and no possible liability for Stamp Duty Land Tax.
8.24 Why should conversion of a qualifying lease to ownership be exempt? For reasons of public policy that are explained earlier in the report we have recommended that the system of ultra-long leasehold tenure be dismantled, and that certain long leases should automatically be converted into ownership on a single day.[57] It would simply be inequitable if, in addition to facing a claim for compensation, a tenant was obliged to notify the conversion and (in possibly some cases) face a charge to tax, given that the State has determined that his or her lease should in the public interest be converted to ownership. In certain circumstances conversion might begin to feel more of a burden than a benefit. There is also the cost-benefit argument. To require notification of conversion where either all or virtually all cases would fall within the zero rate band for Stamp Duty Land Tax[58] would cost more to administer than the amount (if any) that would be collected in tax.
8.25 Recommendation. We recommend that
44. A transaction which results from the conversion of a qualifying lease into a right of ownership shall be treated as a land transaction which is exempt from charge to Stamp Duty Land Tax.
8.26 The draft bill annexed to the Report does not contain a provision implementing this recommendation. This is because the subject of taxes is a reserved matter and is outside the legislative competence of the Scottish Parliament.[59] The recommendation could however be implemented by subordinate legislation as the Treasury has power by regulations to exempt further categories of land transaction from charge.[60]
Translation
8.27 We have considered whether it is necessary to have a translation provision for leasehold terminology along the lines of the provision in the 2000 Act for feudal terminology.[61] In contrast to the 2000 Act, which abolished the entire feudal system of land tenure, the bill if enacted will not abolish leasehold tenure. Only certain ultra-long leases will be affected. A general translation provision of the type used in the 2000 Act would therefore be inappropriate. In those cases where leasehold is converted into ownership, any necessary translations will be implied by the circumstances of the case. For example, if qualifying conditions are converted into real burdens, their terminology must of necessity be thereafter construed as dealing with rights of ownership, and not as dealing with landlord and tenant relationships. For these reasons we do not think that a translation provision is required.
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Note 1 Abolition of Feudal Tenure etc. (Scotland) Act 2000 ss 3 and 46. For the background, see Scot Law Com No 168 paras 2.46 to 2.50. [Back] Note 2 See generally part 4. [Back] Note 4 Land Registration (Scotland) Act 1979 s 9(3). [Back] Note 5 Abolition of Feudal Tenure etc. (Scotland) Act 2000 s 3(b) (adding a new subs (3C) to s 9 of the 1979 Act). [Back] Note 6 Under s 12(1)(b) of the Land Registration (Scotland) Act 1979. [Back] Note 7 Land Registration (Scotland) Act 1979 s 12(1)(b). [Back] Note 8 The same solution is reached by s 3(c) of the 2000 Act. [Back] Note 9 Abolition of Feudal Tenure etc. (Scotland) Act 2000 s 46(1), (2). See Scot Law Com No 168 paras 4.21–4.25. [Back] Note 10 There might, of course, be real burdens affecting the land, but these would be unaffected by leasehold conversion and would simply fall to be added to the title sheet of the (former) qualifying lease. See para 3.25. [Back] Note 13 Paras 5.15–5.23. [Back] Note 14 Land Registration (Scotland) Act 1979 s 4(1). [Back] Note 15 Macdonald v Keeper of the General Register of Sasines 1914 SC 854. [Back] Note 16 Land Registration (Scotland) Rules 1980 r 12. From 22 January 2007, the Land Registration (Scotland) Rules 2006 will be in force. The equivalent provision in the new rules will be r 13. [Back] Note 17 Paras 4.60 and 7.5. [Back] Note 19 Paras 4.45 and 4.48. [Back] Note 21 Paras 4.39–4.40. [Back] Note 22 Paras 5.15–5.23. [Back] Note 25 Paras 4.66–4.70. [Back] Note 26 Land Registration (Scotland) Act 1979 s 25. [Back] Note 27 Short's Tr v Keeper of the Registers of Scotland 1996 SC(HL) 14. [Back] Note 28 But notices of exemption must be registered not later than two months before the appointed day, while there is no time limit for the registration of notices of recall. See paras 7.6 and 7.11. [Back] Note 29 Abolition of Feudal Tenure etc. (Scotland) Act 2000 s 45. [Back] Note 30 The power given to Scottish Ministers by s 65(2) of the bill to prescribe a period rather than a particular date allows a different period to be set for exempt leases which subsequently convert. [Back] Note 31 Registration of Leases (Scotland) Act 1857. By s 18 – repealed by the Land Tenure Reform (Scotland) Act 1974 sched 6 para 5 – the area let could not exceed 50 acres. [Back] Note 32 In theory there could be an assignation in security, but the creditor’s right could be completed only by taking possession. It was the difficulty of creating securities over unregistered leases which was the main impetus behind the introduction of a registration scheme in 1857. [Back] Note 33 The last counties to become operational were the counties of Banff, Caithness, Moray, Orkney and Zetland, Ross and Cromarty, and Sutherland. They became operational on 1 April 2003 (Land Registration (Scotland) Act 1979 (Commencement No 16) Order, SSI 2002/432). [Back] Note 34 Land Registration (Scotland) Act 1979 s 3(3). [Back] Note 35 A lease which is unregistered is not a qualifying lease for the purposes of the scheme: see para 2.31. [Back] Note 36 Scot Law Com DP No 112 para 2.46. [Back] Note 37 Paras 7.10–7.15. [Back] Note 38 Paras 6.17–6.21. In view of the fact that conversion is voluntary and not compulsory, there would be no need to serve an additional notice before the appointed day in respect of claims exceeding £500. [Back] Note 39 The period chosen has to be longer than six months in order to allow a landlord the opportunity to serve a preliminary notice. A period of six months is regarded as the minimum period needed for the service and registration of notices for the conversion of conditions into real burdens and for preservation of sporting rights. See paras 7.13–7.14 above. [Back] Note 41 Finance Act 2003, ss 42(1). [Back] Note 42 Finance Act 2003, s 43(1)(2). [Back] Note 43 Finance Act 2003, s 43(3). [Back] Note 44 Finance Act 2003, s 48(1)). [Back] Note 45 Finance Act 2003, s 49, sched 3, para 1. “Chargeable consideration” is defined in sched 4. [Back] Note 46 Major interest in land includes the interest of an owner of land; Finance Act 2003 s 117(1)(3). [Back] Note 47 Finance Act 2003, s 76(1). [Back] Note 48 Finance Act 2003, s 77(3). [Back] Note 49 Finance Act 2003, s 77(3)(b) inserted by s 298(2)(b) of the Finance Act 2004. [Back] Note 50 Finance Act 2003, s 55 as amended by Finance Act 2006 s 162. [Back] Note 52 Finance Act 2003, s 43(3). Leases are subject to enlargement under the 1925 Act where (i) they were granted for an initial term of 300 years and have more than 200 years left to run; and (ii) either no rent of any monetary value is payable, or a rent of no more than £1 per year has not been collected or paid for a period of 20 years or more. [Back] Note 53 The acquisition may be effected "by act of the parties, by order of a court or other authority, by or under any statutory provision or by operation of law" (Finance Act 2003, s 43(2)). [Back] Note 54 Finance Act 2003, s 50, sched 4, para 1. [Back] Note 55 See generally part 6. [Back] Note 56 Finance Act 2003, s 77(3)(b) inserted by s 298(2)(b) of the Finance Act 2004. [Back] Note 57 See paras 2.1 to 2.12, 3.1 to 3.3 and 3.9 to 3.11. [Back] Note 58 Which currently stands at £125000 for residential property and £150000 for other properties (Finance Act 2003 s 55, as amended by Finance Act 2006 s 162). [Back] Note 59 Scotland Act 1998 s 29, s 30, sched 5, part II, reservation A1. [Back] Note 60 Finance Act 2003 s 49, sched 3, para 5. [Back] Note 61 Abolition of Feudal Tenure etc. (Scotland) Act 2000 s 73. [Back]
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