Proposals for reforming securities over options to buy land

This blog is a follow up to a previous article published in April regarding a project currently being undertaken by the Scottish Law Commission ("SLawCom") considering potential reform to heritable securities. The SLawCom published the third of three discussion papers in June, focussing on the reform of non-monetary securities and sub-securities (security over security).

The discussion paper assessed two scenarios. The first looks at situations where the payment of damages available under the security would be sufficient for the creditor. In this article we focus on the second category which includes securities taken to protect options to buy or lease land.

The current regime

The SLawComm acknowledges that lawyers have developed the practice of using standard securities as a means of flagging the existence of an option agreement or other contract over land because these contracts do not appear on the title to the land and are in effect hidden from third parties. Even if the third party does not know the precise details of the option agreement or contract, registering a security which a third party can see on the title is intended to deter that third party from acquiring the land as this may be in breach of the security. Proposals to publicise these agreements were considered in the previous article.

The existence of the security also brings the "offside goals" rule into play. This can mean that a sale to a third party can be invalidated because the third party has acted in bad faith in breach of an existing agreement to transfer the same property. However, the discussion paper highlights that relying on the "offside goals" rule is unnecessarily complicated and still subject to academic debate as to how effective it is in practice.

Proposals for reform – the conditional advance notice

Given the risks of relying on an "offside goals" rule, the SLawCom proposal is to reform this area by introducing a conditional advance notice (CAN). A CAN would appear on the title of the land affected and give any transfer of the land under the option protected by the CAN priority over any competing transfers. This type of notice would be different from advance notices which already exist to protect sales for up to 35 days around settlement. The CAN would last longer and it would be capable of being extended and assigned in recognition of the fact that options and the types of land contracts being protected can last for many years.

The SLawComm is currently consulting on whether the CAN is the correct mechanism to replace the securities used at the moment and also on matters such as how long a CAN should last, what will it protect against (e.g. insolvency?) and indeed what it might be called. It also notes that the CAN would not be suitable for shorter term leases as it can only protect deeds in connection with long leases (over 20 years) registered in the Land Register of Scotland.

Alternative proposals

The SLawComm also consider alternatives to the proposed CAN system, namely further reform to existing standard security legislation, the use of personal real burdens similar to a pre-emption (right of first refusal) or a system similar to an inhibition against the landowner. For various reasons, each of these options is rejected by them, but there is an opportunity to comment on these alternative proposals.

The discussion paper is open for responses until 29 September and Brodies will continue to monitor for further updates and development. Meantime, if you wish to discuss the impact of these proposals on existing option and security agreements or the future development potential of your land more generally, please contact Graeme Leith or your usual Brodies contact.