Real estate finance law in Scotland

Yes. Security can be granted to a foreign lender.

Yes. Lenders can take a standard security (a Scottish mortgage) over (i) land and buildings on the land (heritable property) and (ii) leases for a term of more than 20 years (or with a right to extend the term to more than 20 years).

There is no distinction in law: real property includes land and all fixtures attached to it. Accordingly, all buildings (unless they are ‘moveables’) by definition constitute ‘land’ and are subject to the same standard security as the plot of land on which they are situated.

No. Mortgage certificates for a certain value are not issued.

Yes. Second ranking security can be taken. The registration is effected the same way as for the first-ranking security. It is usual in commercial transactions for a ranking agreement to be entered into and registered at Registers of Scotland.

Yes, but usually there will be a restriction in the security terms preventing transfer of the property without lender consent.

No.

Yes.

Yes. A lender can take security over rent by way of an assignation of rental income. A standard security over land gives the lender the ability to sell the land with all rents receivable following enforcement and possession; however, an assignation of rents is often taken in commercial transactions to permit swift control of the rents. Intimation (service of notice) to tenants is required

In Scotland, security can be taken by way of an assignation in security of the rights in the bank account. However, as with England and Wales, the creation of an assignation in security requires the lender to exercise control over the charged accounts i.e. to restrict the chargor’s rights to withdraw funds. This is often not practicable in the case of operational accounts. Still, such accounts are subject to a floating charge which ranks behind fixed charges and preferred creditors.

Scotland’s system of land registration comprises the Land Register of Scotland (the modern, map-based register) and the General Register of Sasines (the historic register of deeds which is gradually being phased out). Registration of a standard security is a trigger for “first registration” of the underlying land or lease in the Land Register of Scotland and therefore all standard securities will be registered in the Land Register.

All standard securities over land must be registered by submitting the standard security to the Land Register which then records the details of the security against the title of the secured property.

If the security is created by an English/Scottish registered company or by a foreign company that has registered a branch in England and Wales/Scotland, the standard security should be  registered at Companies House (the UK’s registry of companies) within 21 days after the date of the security’s creation.  Note that “creation” of a standard security is effected by registration in the Land Register of Scotland and not on execution or dating of the document.

Failure to register at the Land Register means that a real right has not been created and a third party purchaser in good faith may acquire the land free of the security. Failure to register at Companies House will render the security conferred by the standard security void against the liquidator or administrator and any creditor of the company.

Execution in Scotland differs to the process for signing in the rest of the UK and therefore caution must be exercised.  Certain rules apply to the way a security instrument is executed, including signing in wet ink, ensuring that there is operative text on the signing page and inserting the date and place of signing.  Note that electronic signing cannot be used for standard securities. There are no additional costs.

Under the Economic Crime (Transparency and Enforcement) Act 2022 (the “ECTEA”), overseas entities that own certain property in Scotland must be registered on the Register of Overseas Entities at Companies House (the “RoOE”). The requirements apply to overseas entities owning land which is registered at the Land Register – i.e. heritable (freehold) land and leases of a term of more than 20 years. The RoOE records the beneficial (actual) owners of the overseas entity and, more recently, third parties on whose behalf the overseas entity holds the property as nominee. The overseas entity must file an update statement at Companies House each year.

Prior to entering into any standard security, in order for the standard security to be registered at the Land Register, an overseas entity must be registered and up-to-date on the RoOE.  An overseas lender does not need to be registered on the RoOE.

In practice, to register a transfer of a property or the grant of a new lease to an overseas entity at the Land Register, and a standard security over the overseas entity’s interest, an overseas entity must be registered and up-to-date on the RoOE: (1) at the time it entered into the standard security (as set out above); and (2) at the time it applies to register the transfer or new lease and standard security at the Land Register.

Separately, the Register of Persons Holding a Controlled Interest in Land (“RCI”) is maintained by Registers of Scotland.  This is a register which outlines who controls the decisions of property owners in Scotland, where this information may not be available or transparent elsewhere. Overseas entities (unless exempt) are required to register as recorded persons and provide details of their “associates” including persons with significant control over decision making and those who directly or indirectly hold more than 25% of the voting rights in the entity.

In contrast to the ECTEA regime, failure to comply with the RCI requirements to make or update an RCI submission does not prevent a property transaction completing.

Note that a registration by an overseas entity in the RCI does not remove the requirement for an overseas entity to register in RoOE. Likewise, a registration of an overseas entity in RoOE will not remove any duty on the overseas entity should they be required to register in the RCI.  However, those entities subject to the Register of People with Significant Control (PSC) regime, held by Companies House, are exempt from RCI requirements. 

Yes.

Again, the position is very similar to that of England and Wales. In bilateral transactions, no new security needs to be signed if the new and the previous lenders assign the standard security as between themselves. However, the lenders commonly require the chargers to confirm that the change to the lenders has no effect on the existing security. In syndicated transactions using a Security Trustee, the security is held automatically for the lenders from time to time.

Control over changes in the tenants depends on the terms of the lease. On completion of an assignation of lease, the original tenant will have no responsibility for ongoing obligations in the lease - this is unless the parties agree otherwise, but this would be highly unusual.

Generally this is done privately. This depends on the type of the charge the lender holds. Two primary remedies available to a holder of security, including a floating charge over the whole or substantially the whole property of a company are (subject to certain conditions): (a) an out-of-court appointment of an administrator (where the company is incorporated in the UK); or in relation to an overseas company, if its centre of main interests (COMI) is in the UK or its COMI is in an EU Member State and there is an establishment in the UK, or (b) an appointment of an administrative receiver (although this is now only possible in a limited number of circumstances).

A holder of a standard security can enforce by “calling up” the security, which is a very formulaic and procedural method of enforcement.  Note that there is no equivalent of an LPA or fixed charge receiver over property in Scotland.  

Yes. Such choice will be recognised and upheld by a Scottish court if (a) it was freely made in good faith by the parties and not for the purpose of avoiding the mandatory law of another jurisdiction; and (b) there are no reasons for avoiding that choice on the grounds of public policy.

Yes, although this depends on any relevant treaties and the common law of the relevant jurisdiction.

Calling up of a standard security is done via the service of notice by the lender on the granter of the charge, along with notices on various interested third parties (where relevant).  The process is highly formulaic and is sensitive to any errors, which would then necessitate recommencing the process from the start. 

Two months after service of valid notices, the lender can enter into possession, collect rents and exercise its power of sale.  The lender is under a statutory duty to take all reasonable steps to ensure that the price at which the property is sold is the best that can reasonably be obtained.  The method of sale is not proscribed, and so auction, private sale or exposure to the open market are permissible in order to satisfy that statutory duty.  Other than in relation to security over property used to any extent for residential purposes, there is no court involvement in the calling up process.

Where the secured property is used to any extent for residential purposes, there are additional pre action requirements placed on lenders and court approval for the calling up is required. This can add significant additional complexity to the process. There is no statutory definition of the phrase “used to any extent for residential purposes” and it is not restricted to the family home of the debtor.  Enforcements over a portfolio of residential properties, over a property with mixed use commercial and retail, over a property operating as a care home, or over a property used as a hotel with the owner or managers residing there would fall within the regime necessitating this enhanced procedure of enforcement.

This depends on the enforcement action taken by the lender. If the lender takes possession of the property, then they will be responsible for maintenance and insurance.

Foreclosure is available but rarely used in practice, as it is only applies where attempts to sell the property have failed. This is a court-based procedure following the requirements of the statutory process.

The Scottish legal regime is generally favourable towards lenders. However, the rules relating to the floating and fixed charges, security over land and the execution/ registration requirements are quite intricate at times and have to be understood in detail to appreciate the quality of the security taken in each particular situation. One example is taking security over shares or bank accounts, which both have Scots law peculiarities.

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

Yes.

Yes. Share charges (please see 4 below) usually rank in order of creation (provided they are properly registered).

1. A share charge must be registered with the Registrar of Companies at Companies House in Scotland/England & Wales (as appropriate) within 21 days from the date of creation of the share charge. A Form MR01 is submitted together with an original of the share charge and a fee.
2. The articles of association may need to be amended to permit a transfer of shares on enforcement of the security.
3. A power of attorney is required from the owner of the shares in favour of the lender (usually included in the share charge itself).
4. The lender should obtain a blank stock transfer form, signed by the owner of the shares.
5. The lender should take custody of the share certificate(s).

The consequences of non-registration include invalidity against administrators and liquidators and a loss of priority against other creditors of the borrower who subsequently register a charge against those assets.

Please see Section A, paragraph 3.2 above.

The cost of registering a share charge with the Registrar of Companies at Companies House is £15 for online submission and £24 for a postal filing.

Yes. In Scotland, the position is different to that of England & Wales, there is no concept of an equitable charge, and so the shares must be transferred into the name of the lender (or its nominee) and a new share certificate to the lender. The lender becomes the owner of the shares and this is recorded in the Register of Members of the company. In the event of a default the lender may sell the shares. When the loan is repaid, the shares are retransferred back to the borrower or shareholder.

This obligation obviously exposes the lender to possible liabilities and/or obligations as owner of the shares and for that reason, this method of security is frequently rejected by lenders.

On enforcement, the shares can be sold to a third party (the powers of sale are usually included in the share charge). It is worth noting that fewer buyers may be willing to buy a private company than the real estate itself due to other potential liabilities related to the company.

Yes. Security can be enforced directly without recourse to the courts or any requirement to have a public auction. A receiver may be appointed under the terms of the share charge to exercise the powers of sale or the lender may sell the shares itself without appointing a receiver.

Yes. As with England and Wales, it is usual in commercial transactions for shareholder loans to be subordinated. This is effected by entering into a subordination agreement or intercreditor agreement. In the light of their experience following the credit crunch, lenders are more concerned that in order to be able to sell the shares without retaining the residual liability for shareholders’ loans, it is necessary to be able to sell the shares free of such debt. This can be achieved if there are provisions for the debt to be written off as part of the enforcement, or if the lender takes security to be taken over the loans from the shareholders. 

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

There is no minimum/maximum length of lease and this depends on commercial negotiation. Retail leases in the current market would typically be for 5 – 10 years with prime office leases for a typical term of 15 – 20 years. The average length of a new lease appears to be shortening however.

The lease length is commercially agreed between the parties. Lease terms can extend up to 175 years.

A lease in Scotland does not automatically come to an end on its termination date and, instead, notice must be served by either the landlord or tenant. By a process known as “tacit relocation”, the lease will renew for a period of one year if the original lease term was for more than one year (if it was for less than one year, it will renew for the original term). 

The Tenancy of Shops (Scotland) Act 1949 permits tenants of certain shop premises (e.g.  retail, hairdressers etc) to apply to the courts to renew their lease for a period of up to one year; however this is rarely used and the law in this area is likely to be reformed.

As stated above, tacit relocation operates to automatically renew leases unless the parties serve notice to terminate. There are no statutes concerning the ability of the tenant to break a fixed term lease.

None other than any contractual break rights which may be agreed between the parties.

Rent is typically paid either quarterly or monthly in advance, but can be in arrears and depends on what is commercially agreed between the parties.

To be determined commercially between the parties but typically on office leases, rent is reviewed every five years.

As agreed between the parties, but typically upwards-only based on market rent.

No.

This depends on what is agreed between the parties and the extent of the premises demised (let) to the tenant. If the internal premises only are demised, then the landlord would usually retain the obligations for external maintenance, decoration and repair and may recharge any costs incurred to the tenant through a service charge. Where the tenant takes a lease of the whole property (internal and external) it would be usual for the tenant to be responsible for all internal and external repairs and maintenance.

See 3.1 above.

See 3.1 above.

Either party can insure the premises, although it is usual for the landlord to insure with the cost of insurance being recovered from a tenant.

Value-added tax will be payable where the landlord has opted to charge VAT in respect of the property.

These are usually the responsibility of the tenant.

Dependent on what is commercially agreed between the parties but the tenant will usually pay all other outgoings (e.g. utilities) for its premises.

Where the landlord manages the property (which is usual where the premises form part of a multi-let building or estate), it will provide the services (which usually, include security, heating, lighting and decoration, repair/replacement of external and common areas and equipment). All such costs would be recovered by way of a service charge.

Yes.

If there is no specific requirement a RICS appraisal would be a sensible precaution. The requirements as to any appraisal will depend on what is prescribed by the relevant documentation, e.g. definition and requirements of a ‘Valuation’ in a contract.

Yes. An environmental consultant may be appointed to undertake a range of different investigations and reports and more recently there is an increasing amount of reporting and searches on climate change risk.

Yes. A lender may assume the liability attaching to a borrower, depending on the liabilities of the borrower. For example, where there are past breaches the borrower or its purchaser may have agreed to indemnify a previous owner against all environmental liabilities and a lender when enforcing its security may assume this liability. Where there are present breaches of environmental law, it is assumed that any owner, including a creditor which is in possession of the land, would be liable.