Land and Tax Reform in Scotland: changes for mortgage lenders

 The Land and Buildings Transaction Tax introduced to replace stamp duty land tax in Scotland.

27 April 2015

In the wake of the ‘No’ vote in the Scottish Referendum, Scots solicitors and civil servants alike returned to those comfort zones of reform – land and tax.

In December 2014 the Land Registration etc. (Scotland) Act 2012 came into force and April has brought both Spring and the introduction of the Land and Buildings Transaction Tax to replace stamp duty land tax in Scotland.

While neither creates seismic shifts within the political or, even, legal landscape they bring subtle and practical changes which impact on the sale and purchase of residential property. Though these are the day-to-day responsibility of the solicitors acting for you they are also changes to be aware of for the short, medium and long term:

  • Short term – changes to standard lending documents to reflect new practices or terminology.
  • Medium term – changes to the title documents that can be held during the life of the mortgage.
  • Long term – changes that could impact on the warranties that will be expected as part of any future sale to a third party purchaser or securitisation structure.  

Land Registration etc. (Scotland) Act 2012
The 2012 Act focused on reforming the manner in which legal rights in land are registered. We highlight the following changes as being those most relevant to lenders in the residential market.

What does your Standard Security say about you?
One of the principles informing current land reform is to increase the ease of establishing who owns what. Registers of Scotland now require the capture of certain details about parties to deeds either within the application form or the deed itself. To avoid the risk of an application to register a standard security being rejected on a technicality due to this information not being completed within the form it should be considered whether it would be prudent to ensure that the form of standard security provided to solicitors includes all of the following details (for the lender): (i) name; (ii) company or other designated number; (iii) address; (iv) jurisdiction of incorporation or establishment.

Letters of Obligation v Advance Notices    
Before December 2014, purchasers and their lenders relied on a set of undertakings from the selling solicitor, called a “letter of obligation”, confirming that nothing prejudicial to the registration of a borrower’s title and their lender’s standard security would be registered against the property for 14 days after completion. This created a secure window during which the standard security (and where applicable the borrower’s title) would be submitted to Registers of Scotland. Obtaining a satisfactory letter of obligation was an essential feature of a lender’s instructions to solicitors.

Under the new legislation, the period of risk for borrowers and their lender between completion and registration is now covered through the advance notice system administered by Registers of Scotland, and which creates a protected period similar, broadly, to the priority period obtainable at HM Land Registry in relation to property located in England and Wales.

The main features are:

  • an advance notice provides a 35 day protected period for a specified deed
  • the deed is protected from the consequences of a competing deed granted to a third party being registered or an inhibition being made in relation to the borrower
  • an advance notice cannot be extended or renewed; if it expires without the deed having been submitted for registration then a new notice is needed
  • only the person granting the deed or a third party with the consent of such person can apply for an advance notice

Therefore, in place of the duty to obtain an appropriate letter of obligation the lender’s solicitor should now be expected to ensure that an advance notice is in place covering the borrower’s title and the standard security and that the advance notice has been registered by an appropriate party with the appropriate consents.

Land and Charge Certificates v the Title Sheet
The love affair between lenders and their borrowers’ title deeds has historically been much stronger in England and Wales where possession of the title deeds was entwined, in certain cases, with evidencing the mortgage. In Scotland, where registration is paramount, the 2012 Act is a further step in Registers of Scotland’s pursuit of the paperless title. The familiar yellow and green covers of Land Certificates and Charge Certificates will no longer be seen, replaced by a Title Sheet held and kept updated online. While the contents and sections of the Title Sheet continue  to disclose the same information as featured in the Land Certificate it will exist primarily in electronic form with an option to obtain physical extracts (for a cost) of all or parts of the Title Sheet in the event one ever requires a physical copy with evidential status.

As a result, current instructions to pass on Land and Charge Certificates post-completion will no longer be appropriate. Instead only a PDF of the Title Sheet will be available unless an extract copy is specifically requested.

Keeper’s Indemnity v Keeper’s Warranty
The indemnity previously provided by the Keeper of the Registers in relation to the contents of the Title Sheet continues but in the restricted and more tightly defined guise of the Keeper’s warranty which will be available only to the owner of the property, the applicant in a registration and/or any person to whom warrandice is granted (warrandice being the Scottish equivalent of title guarantee). On completion of the relevant registration, the Keeper will warrant that the title sheet is accurate and may be liable to pay compensation where there is any inaccuracy that is subsequently rectified. The net effect is that the focus will rest even more on a proper examination of title and ensuring solicitors fully investigate situations where the Title Sheet notes that the Keeper has excluded or limited the extent of the Keeper’s warranty.

Searches v Legal Reports
The practice of obtaining (depending on the circumstances and register involved) Forms 10 and 11 or 12 and 13 searches have been replaced by a new format embodied by the Legal Report. Legal Reports will disclose similar information but have been introduced to comply with the technical requirements of the 2012 Act and so are mentioned here only to note that any references to Forms 10, 11, 12 or 13 should be updated. Similarly, any references to P16 Reports are also outdated and should now refer to the applicable level of Plan Report.

Caveat Consideration
The 2012 Act allows, for the first time, ‘caveats’ to be detailed on the Title Sheet which will give notice of any on-going court action that affects that property. While a caveat does not prevent a transfer of the property they should be handled with caution as a party cannot be deemed to have transacted in good faith with knowledge of their existence and this may lead to an exclusion or limitation of the Keeper’s warranty. As such, lenders should ensure that the solicitor acting will bring any caveat listed on the Title Sheet to their attention.

Land and Buildings Transaction Tax
With effect from 1 April, Land and Buildings Transaction Tax applies to property sales and purchases in Scotland in place of stamp duty land tax. As with SDLT, payment of the LBTT must be included in the application (or otherwise verified as having been paid electronically to Revenue Scotland) before Registers of Scotland will accept a deed for registration. Accordingly any reference within lending or instruction documentation to SDLT should be updated.

If you have any queries about the effect of these changes, particularly in the context of your lending documentation or origination processes, please contact  your usual Shepherd and Wedderburn contact.