The Long Leases (Scotland) Bill was re-introduced to the Scottish Parliament on 12 January 2012. For more information please see our previous article.
In this article we identified 2 policy issues which had been the subject of discussion when the bill was introduced last year. One was the scope of the exemption for commercial leases and the other was whether common good land and property will be affected by the conversion scheme. The draft bill has now addressed some of the concerns surrounding commercial leases.
One of the biggest debates so far has been whether commercial leases should be included within the ambit of the conversion scheme.
The Scottish Law Commission were originally against making distinctions based on the type of property being leased. However concerns were raised that a number of long commercial leases existed where landlords retain a significant interest in the property and where it would be inequitable for tenants to become owners automatically.
In an attempt to respond to concerns raised by the property industry, the Scottish Government introduced the exclusion for leases where the annual rent is greater than £100. As initially proposed, this exclusion unfortunately didn't catch all commercial leases as variable rent was not to be taken into account. For example, leases granted for a large premium and minimal rent, or leases involving turnover rent were not caught.
The draft bill introduced to Parliament appears to address some of these concerns. The bill retains the exemption for leases where the annual rent is over £100. It also now entitles the landlord to register either (i) an agreement with the tenant or (ii) an order made by the Lands Tribunal providing either that the annual rent immediately before the appointed day will exceed £100 or that the annual rent was over £100 at any point in the 5 year period before the bill is passed. If such an agreement or order is registered, the lease will not convert to ownership.
It should be noted that before making an application to the Lands Tribunal the landlord must first try to reach agreement with the tenant. The application to the Lands Tribunal must also be made no later than 1 year after the relevant provisions of the bill come into force.
Although this addresses the issue of variable or turnover rent it does not help leases where a significant grassum or premium was paid up front and the annual rental is then very low, below £100 a year. The Government were of the view, and we would tend to agree, that in these cases the on-going interest of the landlord is low and there is no case for exemption.
No further amendments have been made in respect of common good land. As mentioned in our previous article the Justice Committee did not recommend that leases of common good property be excluded from the bill but said that any compensation received by local authorities where such leases are converted to ownership should be paid into the local authority's common good fund. We understand that the Scottish Government has written to local authorities on this point and we would imagine that this will again be one of the main discussion topics as the bill proceeds through Parliament.
It is proposed that the appointed day, which is the day when qualifying leases are converted into ownership, will be at least two years after the bill receives Royal Assent. We would nevertheless recommend that anyone who may be affected by the proposals considers their options sooner rather than later.