Landlord's hypothec is a common law right of security enjoyed by landlords over any 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.
Amongst other things, the Bankruptcy & Diligence etc (Scotland) Act 2007 significantly reforms the common law security of landlord's hypothec. These reforms come into force on 1 April 2008.
Changes in the law
The Act:
- abolishes sequestration for rent
- reforms the scope of the hypothec; and
- converts the hypothec into a security that will crystallise insolvency.
Abolition of sequestration for rent
While this procedure will be abolished, any sequestration for rent proceedings which have been raised prior to 1 April 2008 will be able to continue. Such proceedings will however be affected by some of the other reforms. In particular, some assets which hypothec currently catches will not be caught after 1 April 2008.
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 arise in relation to any property kept in a dwellinghouse, on agricultural land or on a croft.
- The hypothec will no longer secure any property owned by a person other than the tenant.
- 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.
- Where property is owned by the tenant and another person, only the tenant's share will only be affected by the hypothec.
However, it is not all bad news for landlords. The Act significantly extends the amount of rent which will be secured by landlord's hypothec to all unpaid rent (subject to the usual rules of prescription of debt).
Conversion to a preference on insolvency
The Act states that, notwithstanding the abolition of sequestration for rent, landlord's hypothec continues 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.
In practice
The reforms present both advantages and disadvantages to landlords. On the one hand, the scope of the assets which are vulnerable to the hypothec have been reduced. On the other, however, the level of arrears secured has been extended.
Similarly, while the remedy of sequestration for rent has been abolished, the position of the landlord in the event of insolvency – which was previously unclear in law – has now been settled.
In future, a prudent landlord will:
- Keep a close eye on any tenants who show signs of having difficulty in meeting rental arrears; and
- Keep himself abreast of what is on the leased premises and be ready to act at short notice, whether by obtaining a court order to prevent a tenant removing assets from the premises or in being ready to inventorise (preferably with photographic or video evidence) the assets on site in the event of insolvency so that he will be in a position to claim the full value of his security.