Important changes to Landlord's hypothec
What is Landlord's hypothec?
Landlord's hypothec is a common law right of security enjoyed by landlords over moveable goods sited on the leased premises. Originally, landlord's hypothec:
- covered all goods on the premises regardless of who owned those goods;
- did not secure all rental arrears only a portion of these; and
- was enforced by court proceedings known as sequestration for rent.
- abolition of sequestration for rent;
- reform of the scope of the hypothec; and
- conversion of the hypothec into a security that will crystallise on insolvency.
Reform of the scope of the hypothec
The reforms will significantly restrict which assets will be caught by the hypothec:
- The hypothec will no longer secure any property owned by a person other than the tenant;
- Insofar as any property is owned by the tenant and another person, only the tenant's share will be affected by the hypothec;
- Any property acquired by a third party from the tenant in good faith will cease to be subject to the hypothec when it is acquired by that person;
- The Act significantly extends the amount of rent which is secured by the hypothec to all unpaid rent (subject to the usual rules of prescription of debt); and
- The hypothec will no longer arise in relation to any property kept in a dwellinghouse, on agricultural land or on a croft.
Conversion to a preference on insolvency
Notwithstanding the abolition of sequestration for rent, landlord's hypothec is continue as a right in security that will rank in an insolvency situation. Accordingly, the only point at which the security may be enforced will be when the tenant becomes formally insolvent.
- The effect of insolvency on landlord's hypothec was previously unclear therefore the Act provides some much-needed clarification in this area of the law.
- The reduction in the scope of the hypothec will also assist insolvency practitioners who will no longer have to arbitrate between landlords and third party owners of goods on the premises.
- One point upon which the Act is unclear is whether the onus will be on the insolvency practitioner to value the security enjoyed by the landlord on insolvency and pay over the relevant sale proceeds to him, or whether the onus will be on the landlord to claim the security. Until this issue is clarified, it may be prudent for insolvency practitioners to assume that they will be expected to deal with this.
- In cases where, for example, the business is sold as a going concern, thought will require to be given as to how the total purchase price is to be allocated between the lease, the moveable property, goodwill etc. since a landlord who is owed any rental arrears will enjoy a security over a portion of these proceeds.