In any option agreement or contract for the sale of land, developers and landowners alike will be subject to various obligations. This article explains when standard securities can be used to secure some of those obligations, some difficulties with this in practice and proposals for reform.
What is a standard security?
A standard security is the only type of security that can be taken over land in Scotland. It is an extremely common type of security and will be familiar to readers in the context of mortgages, which are loans secured against a property by way of a standard security.
If the debtor defaults on the obligations secured by the standard security, the security holder can enforce the security, which usually involves selling the property to satisfy the debt which is owed.
What types of obligations can be secured?
Standard securities are typically used to secured obligations to pay money, such as an obligation to repay a loan. But this is not the only type of obligation that can be secured. It is also possible for a standard security to secure an obligation to do something, such as to build a wall or to sell a piece of land to a specific person (these are sometimes referred to as obligations ad factum praestandum).
There are three typical scenarios where a standard security might be used to secure obligations in contracts for the acquisition of land for housebuilding.
Scenario 1: overage payments
Where a deal for the sale of a piece of land includes the potential for overage payments, a standard security can secure the purchaser's obligation to pay the seller overage when it becomes due.
Of the three scenarios, this is the most straightforward, because the purpose of the security is to ensure the payment of money. If the purchaser fails to pay the overage when it falls due, the seller could enforce the security and may ultimately be entitled to sell the land and use the proceeds to pay the overage.
Scenario 2: options
Another use for standard securities in land transactions is to secure the obligations of a landowner under an option agreement, specifically the obligation to sell the land to the developer if certain conditions are met.
Although widely used in practice, there are some difficulties with the effectiveness of standard securities in securing options. The main problem is that the obligation in question is not for the payment of money. So, if the landowner defaults on their obligation, what is the developer's remedy?
The main method of enforcing a standard security is by the security holder selling the land to a third party. This is almost the opposite of what the developer wants – the purpose of the option is to ensure that the developer can become the owner of the land and that it is not sold to a third party! If the terms of the option agreement and standard security allow it, the developer may be able to sell the land and use the money raised to satisfy any damages claim the developer may have against the landowner. This may be some comfort to the developer, but it does not achieve their original goal of owning the land itself.
Notwithstanding the potential difficulties with enforcement, standards securities of this type do have a significant practical use. Because a standard security is registered in the Land Register, any third party who might be thinking of buying the land will be alerted to its existence. The mere existence of the security is usually enough to put the third party off the idea of completing the purchase. If the third party proceeds regardless, the developer may be able to have the sale to the third party cancelled under a rule known as the "offside goals rule", depending on the precise circumstances. For these reasons, standard securities continue to be used routinely in connection with option agreements.
Scenario 3: suspensive conditions
Thirdly, standard securities can be used to secure the landowner's obligations in missives which are subject to suspensive conditions. An example would be the landowner's obligation to provide support and assistance to the purchaser to obtain planning permission. Standard securities of this type suffer from the same difficulties as regards remedies that were identified in scenario 2 above. But their existence might nevertheless be enough to encourage the landowner to comply with their obligations.
Proposals for reform
Finally, there is good news for developers who may be concerned about the difficulties described in this article. The Scottish Law Commission is currently considering proposals for reform to address the problems with the use of standard securities to secure non-monetary obligations. This may include the introduction of a new type of advance notice which could be registered in the Land Register to protect options to purchase land against any sale to a third party. If enacted, such a system could put developers on a surer footing when it comes to options to purchase land.
For more advice on the use or enforcement of standard securities or any other aspect of land transactions, developers can get in touch with our Real Estate Litigation team or their usual contact in the Brodies Living team.
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