Legal Briefing

Commercial property Scotland: an update

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Scotland | 01 June 2015

The pace of the change in the commercial property market in Scotland has been rapid of late. Within five months of each other, a new land registration system and a new property tax have been introduced. Coupled with developments in case law and the pursuit of the green agenda, property lawyers have been kept on their toes.

The new land registration system was introduced by the Land Registration etc (Scotland) Act 2012 on 8 December 2014. The most significant changes have been 
the introduction of the advance notice system and a change in the role and guarantee offered by the Keeper of the Register of Scotland.

An advance notice is registered against a title prior to settlement. It protects a deed against inhibitions and competing deeds, but only lasts for 35 days. The advance notice can be renewed, ie a new period of protection can be triggered, but the old one cannot be extended. The Register is not frozen when an advance notice is registered. If a deed protected by an advance notice is not registered during the protected period, any competing deeds presented for registration before a new protected period takes effect will take precedence.

The Keeper of the Registers does not examine title in the way she did previously. Solicitors must certify to the Keeper that the title which the applicant is seeking to register is valid. The Keeper continues to guarantee titles by granting warranty, not indemnity as it was under the old system. When a title was registered under the old system, it could only be rectified in rare circumstances, usually involving fraud or negligence. In contrast, under the new system, a registered title will be rectified by the Keeper if there is a manifest inaccuracy in the title. There will be protection for purchasers of titles registered under the 2012 Act if there has been one year’s peaceable possession of that title. In that case, the title cannot be rectified against them if they have acted in good faith.

The other major change for Scottish property lawyers this year was the introduction of the new Land and Buildings Transaction Tax (LBTT). LBTT replaced Stamp Duty Land Tax (SDLT) for all property transactions completed on or after 1 April 2015 in Scotland. LBTT is a progressive tax with different rates payable on different parts of the price. The Scottish Government is in charge of setting the rates and Revenue Scotland is the body charged with administering and collecting LBTT. LBTT is similar to SDLT in many ways but very different in others.

No deed can be presented for registration at Registers of Scotland unless the applicant can confirm that arrangements have been made to pay any LBTT due for the transaction. LBTT must therefore in effect be paid within five days of the deed being presented for registration. This is in contrast to SDLT, which still applies to property transactions in the remainder of the UK. SDLT must be paid within 30 days of the effective date of the transaction, regardless of when a deed is registered. The different time limits for payment of LBTT and SDLT will have to be borne in mind in cross-border transactions where properties north and south of the border are part of one deal.

Lease transactions are treated very differently under LBTT. Under the SDLT regime, a tenant rarely submits more than one return to HMRC and rarely has to pay more SDLT throughout the term of the lease. The aim is for LBTT to be paid at a rate that more closely reflects the rent being paid under a lease. To achieve this, tenants are required to submit an LBTT return at the beginning of a lease, every three years throughout the term of a lease, at the point they assign the lease and at the end of the lease. Each time they submit a return, the amount of LBTT to be paid for the lease will be reviewed on the basis of the actual rent being paid. If the rent has increased and more LBTT is due, the tenant will have to pay the additional LBTT to Revenue Scotland.

Revenue Scotland has an extended window of three years in which to initiate an inquiry into a return, compared with only nine months for HMRC under the SDLT regime. It is thought that Revenue Scotland will police the new tax strictly in order to pursue the Scottish Government’s agenda of clamping down on tax avoidance.

In a different pursuit for recovery of money, the Scottish courts have been dealing with a number of landlord and tenant disputes over dilapidations. A new theme has been developing in such cases of late. Where in the past, landlords have been successful in recovering large amounts of damages in lieu of tenants carrying out repairs required under schedules of dilapidations, the courts have been moving towards restricting those damages, especially where there is no evidence that the landlords themselves intend to carry out the works.

The new theme began to develop in the case of Grove Investments Ltd v Cape Building Products Ltd [2014] in which Brodies LLP represented the tenant. Following expiry of the lease, Grove raised an action against the tenant and tried to argue that the dilapidations liability could be recovered under a payment clause in the lease that obliged the tenant to pay the cost of the works irrespective of whether or not the landlord intended to carry them out. The case turned on the meaning of the words ‘value of the schedule of dilapidations’ with the tenant arguing that it wasn’t a payment obligation because value could have a number of meanings, including diminution in value and the landlord arguing that it referred to the cost of the works.

The opinion of the Inner House of the Court of Session (the highest appeal court in Scotland) came down firmly against the landlord. The court agreed with the tenant’s interpretation, allowing the tenant to introduce alternative measures of loss including, in particular, diminution of value. The court also indicated that the parties could contract out of the common law and include effective payment obligations if the right form of words were included in the lease.

The Grove case has since been followed and referred to in further cases dealing with dilapidations including @SIPP (Pension Trustees) Ltd v Insight Travel Services Ltd [2014] in which Brodies LLP again represented the tenant. Once again the court agreed with the tenant that the correct construction of the clause in question was that it was not a payment obligation.

For now, therefore, it seems likely that the Scottish courts will take a view that, where there is any ambiguity in the lease drafting, the common law position should be preferred. This will open up alternative measures of loss for tenants and allow them to take the landlord to task on whether or not they will be doing the works. Perhaps the most likely example of where the tenant can say that the works will not be done and, therefore, there should be no liability for repairs, is when the landlord intends to demolish the building.

Landlords will have to think about how works to improve energy efficiency should be done to their properties, who should do them and who should pay for them. The Scottish Government has taken a different approach to that adopted in England and Wales, and has not introduced minimum energy efficiency standards. The Energy Act 2011 made energy efficiency standards compulsory in England and Wales from April 2018 but gave the Scottish Government discretion on whether to introduce such standards. In England and Wales, landlords of commercial properties will not be permitted to lease those properties after April 2018 if the properties have an Energy Performance Certificate (EPC) rating of F or G. Such a prohibition will not apply in Scotland.

In the summer of 2016, regulations under s63 of the Climate Change (Scotland) Act 2009 will require either works to be carried out to a property or the owner of that property to monitor and report its energy use annually. This obligation will be triggered when the property is sold or a new lease is granted in respect of the property. Tenants intending to renew their lease and stay in the property will not be affected.

Initially, the regulations will affect properties with a heated or cooled floor area over 1000m2 which do not comply with the energy efficiency standards under the 2002 Building Regulations in Scotland. Exemptions will include temporary buildings and buildings for which the Green Deal has been used to fund improvements.

When the property is to be sold or leased, an Action Plan for Carbon and Energy Performance (ACEP) will have to be obtained and exhibited by the seller or landlord. The ACEP will consist of an EPC and Action Plan setting out the works which could be carried out to the property to improve the energy efficiency. If the owner chooses to do the works, they will have three and a half years to complete them. The types of works which will be called for will be contained in the regulations.

If the owner does not want to do the works, they can choose to record actual metered energy use via a Display Energy Certificate (DEC), which will be reported on an annual basis. The Scottish Government has warned that adopting the operational ratings regime will in effect be a deferral of the obligation to carry out works. They will be monitoring the reports of energy efficiency and if they do not see an improvement, they will move to make it compulsory to carry out improvement works to the property.

As would seem to be the norm when introducing such regulations, the Scottish Government is not going to interfere with the landlord and tenant relationship, and is leaving it up to landlords and tenants to agree who is going to foot the bill for complying with the regulations. Tenants may argue that general catch all provisions for statutory compliance may not be sufficient to impose such obligations on them and so, if landlords want tenants to have full responsibility, they will have to include such provision in their lease.

I hope the above has given you a flavour of the changes and developments in the legal world of commercial property in Scotland.