The Moveable Transactions (Scotland) Act 2023 – Real Estate Finance

The Moveable Transactions (Scotland) Act 2023 ('MTA'), which comes into force on 1 April 2025, marks a significant evolution, not just for the Scottish legal landscape but also for anyone doing (and financing) business and properties in Scotland. This is due to the introduction of a revised framework for taking security over monetary claims and a new form of security, the statutory pledge.

The Reforms

Scots law currently presents a variety of issues to lenders wishing to take fixed security over rights and intangible assets (referred to as incorporeal moveables) governed by Scots law, including: 

1. fixed security over rights (such as the right to receive rent under a lease) is taken by way of a Scots law "assignation". This requires the assignation to be intimated (notified) to affected third parties (for example, tenants) for the security to be effective. This is akin to an English law "legal assignment" however the concept of equity in England (which is not recognised in Scots law) allows an "equitable assignment" to be taken which does not require notification as a perfection step. At present, the broad market practice is to intimate by recorded delivery; and 
2. fixed security over incorporeal moveables is perfected by way of transfer (pledge) of the asset, such that the lender or third party holding to the order of the lender is in possession of the secured asset.

The MTA aims to update the Scottish approach by introducing the following (noting it does not affect financing arrangements already in place):

1. creation of a new and publicly available "Register of Assignations" to record new statutory "assignations of claims" and the ability to perfect these assignations by registration, rather than by intimation;
2. creation of a new "statutory pledge" which is a new non-possessory fixed security for incorporeal moveables and creation of a new and publicly available Register of Statutory Pledges, where statutory pledges will be perfected upon registration in both this register and Companies House; and
3. intimation of assignations may be completed electronically, rather than by post, reducing administrative burden and cost.

It is clear these reforms will have significant impact for financing opportunities with a Scottish nexus. Here we explore some of the benefits the MTA will bring to the Scottish real estate market.

Security over Rental Income

While a standard security will remain the only competent way to take security over Scottish land, the ability to complete intimation electronically and/or perfect the assignation by registration in the Register of Assignations means that it will no longer be necessary to individually notify each tenant by post when completing assignations of rental income. As well as reducing administrative burden and cost, this will be particularly helpful in transactions involving properties with large numbers of tenants which change regularly, such as student accommodation, buy-to-rent, and commercial retail properties.

Indeed, there is the option to register an assignation in the Register of Assignations without intimation (either electronically or by post) to tenants. As well as the obvious advantage of not immediately notifying tenants of what may be a sensitive subject, it can also avoid confusion (for instance as to where to pay rent) and more closely follow the position taken on English real estate financings.

Future Rights

There is uncertainty as to whether granting fixed security over future assets (e.g. security over leases that haven't been entered into yet) is effective under Scots law. Accordingly, it is common practice to take supplemental assignations should any new rights be created following the effective date of the initial security document. Depending on the commercial realities of a transaction and the nature of the underlying asset(s), lenders may "sweep up" new leases on an annual or quarterly basis.

Under the MTA, there are specific provisions for assignations of future rights, therefore giving lenders greater comfort that rental income from new leases is secured from the "day one", without requirement for ongoing legal and related costs.

Construction Documents

Within development finance lenders may take security over certain construction documents to (among other things) enable the lender to "step in" to the shoes of the borrower under specified scenarios, for example upon the occurrence of a default. The new legislation will enable this security to be taken over future development contracts, which will streamline current process and, again, reduce costs. There is also the potential for the MTA to resolve issues regarding assignations of collateral warranties.

Bank Account Security

Security over rental income accounts is a fundamental element of most real estate financing transactions. The current practice of taking security over bank accounts located in Scotland by way of assignation can cause issues where the account holder still exercises an element of control over that account (for example, it is able to make withdrawals without reference to the security-holder). In addition, where the account bank and the secured party are the same legal person, the right of "set-off" is arguably what is being relied on, rather than an assignation of account balances – for more discussion, please see our blog on bank account security.

Assuming the ambit of the MTA includes bank accounts (still to be finally settled ahead of implementation), the ability to address some of these issues in respect of blocked and unblocked accounts will be of benefit to lenders.

Share Security

Shares in Scottish companies must be transferred to the lender in order to create perfected, effective share security. This can result in a variety of issues, such as:

• will the lender have to consolidate the shares in its accounts?;

• who is entitled to dividends and do proxies need to be entered into in relation to voting rights?;

• the risk that the lender may be liable for any shortfall where the company whose shares have been transferred is unable to meet its pension scheme liabilities; and

• under the National Security and Investment Act 2021, where a company operates in a designated sector and falls within parameters set by the Government, a mandatory notification will need to be made to the Secretary of State and approval sought to the grant of security.

Taking a statutory pledge over shares in a company (or interests in other types of corporate vehicles, such as limited liability partnerships) avoids the need to transfer the shares (or interests) into the name of the lender or chargee. As with bank accounts, it is still to be formally confirmed that the MTA will extend to security over shares and securities equivalent to shares.

High Value Assets

It will be possible to take a separate statutory pledge over high value moveable assets (such as plant machinery and vehicles), giving lenders extra protection and potentially making finance more readily available and cheaper.

Preparing for Commencement

By simplifying and modernising processes for securing rights and incorporeal moveables in Scotland, the MTA will have a substantial effect on lenders and businesses, creating a much more streamlined approach. This will open new financial products to the Scottish market and making debt funding more readily available and, again, cheaper. Within real estate finance, the MTA has the potential to bring significant benefits to parties ready to take advantage of the new opportunities from the commencement date of 1 April 2025.

If you would like to discuss anything raised in this blog in more detail, including how you can prepare for commencement, please contact a member of the Banking, Finance, and Restructuring team or your usual Brodies contact.