Conversion of long leases to outright ownership in Scotland

Out-Law Guide | 28 Oct 2013 | 7:29 am | 3 min. read

Tenants under certain long leases in Scotland automatically became the owners of the property from 28 November 2015. This guide outlines who this affected.

A version of this guide first appeared in Estates Gazette. Last updated on 8 May 2018.

Long leases are relatively rare in Scotland and the Scottish Government estimated that about 9000 leases were affected.

The Long Leases (Scotland) Act 2012 automatically converted the tenant's interest under certain long leases in Scotland to outright ownership on 28 November 2015. This legislation was part of the Scottish Government's programme of modernisation of land law in Scotland which included the abolition of the feudal system in 2004.

The use of long leases

In contrast to England and Wales, long leases have never been popular in Scotland. There are two principal reasons for this:

  • the historic feudal system (abolished in 2004) provided an alternative to long leases by allowing the seller of property to create entitlement to a perennial income stream from the property and impose lease type controls on the use of the property by future owners; and
  • ownership of property in Scotland has always been capable of horizontal division, whereas in England and Wales such division required to be created under a lease structure.

The 2012 Act complements previous legislation which served to prevent a quasi-feudal structure being created by means of long leases. In 1974, legislation restricted the maximum length of newly created residential leases to 20 years, with further legislation in 2000 restricting the maximum length of newly created commercial leases to 175 years.

The 2012 Act operated to abolish those remaining historic long leases which the Scottish Government considered granted a tenant a right more akin to ownership than the right of a tenant under a lease. The result is that the landlord has no further interest in the property and the tenant became the owner.

What happened

  • On 28 November 2015 the tenant's interest under a qualifying lease (see below) automatically converted to ownership
  • Tenants could choose to opt out of the legislation but landlords could not
  • Compensation was payable to landlords for loss of rent and other rights but the deadline for making claims, 28 November 2017, has now passed
  • Certain lease conditions automatically converted into title conditions affecting the tenant's new interest in the property for the benefit of neighbouring properties. Other lease conditions may have converted to title conditions on registration of a notice by the person entitled to enforce the condition
  • The landlord's title was extinguished on 28 November 2015 and any standard security (legal charge) over the landlord's title ceased to have effect
  • Any standard security over the tenant's interest in a long lease remains and the tenant owns the property subject to that security

Qualifying Leases under the Act

Certain conditions had to be met for a lease to qualify for conversion. A qualifying lease must:

  • have been registered
  • have originally been granted for a term of more than 175 years
  • have more than 175 years of the term left to run (if non-residential) as at 28 November 2015
  • have more than 100 years left to run (if residential) as at 28 November 2015
  • have had an annual rent of £100 or less
  • not be a lease of a harbour in respect of which there is a harbour authority
  • not be a lease of minerals
  • not be a lease granted for the sole purpose of installing and maintaining pipes or cables

There was concern that the legislation would inadvertently deliver a windfall to tenants who had been granted long leases for development purposes at a commercial rent. The ascension of the tenant to ownership would result in the deposed landlord (often a local authority) being deprived of a valuable asset it wished to retain. To address this, the legislation provided that for a lease to qualify for conversion the annual rent must not exceed £100.

Considerations for tenants

There was unfounded concern at the potential impact of the legislation on capital allowance tax treatment of Enterprise Zone schemes set up using long lease structures. Investors, who typically acquired a tenant's interest, could look to the provisions of the relevant tax legislation which gave comfort that the relevant interest (for tax purposes) converted from the tenant's interest to the owner's interest when the leasehold structure extinguished.

For further information on how the tenant's title to the property converted to ownership in the Land Register of Scotland see the Registers of Scotland website.