The Bankruptcy & Diligence etc. (Scotland) Bill proposes major reform of the common law security of landlord's hypothec. The reforms pose a number of potential pitfalls for insolvency practitioners.
What is Landlord's Hypothec?
Landlord's hypothec is a common law right of security enjoyed by landlords over any goods sited on the leased premises, regardless of who owns those goods. The hypothec does not secure all sums which happen to be due to the landlord, only a portion of the rent. Landlord's hypothec is enforced by court proceedings known as sequestration for rent.
The Bill proposes to:-
1. abolish sequestration for rent
2. reform the extent of the hypothec; and
3. convert the security into a preference on insolvency
The Detailed Provisions
1. Abolition of sequestration for rent
Whilst this procedure will be abolished, any sequestration for rent proceedings which have been raised prior to the Bill coming into force will be able to continue. However, it should be noted that such proceedings will be affected by some of the other reforms. In particular, some assets which hypothec currently catches will not be caught after the Bill comes into force.
2. Reform of the extent of the hypothec
A number of reforms are proposed which will significantly restrict which assets will be caught:-
1. The hypothec will no longer arise in relation to any property kept in a dwellinghouse, on agricultural land or on a croft
2. The hypothec will no longer secure any property owned by a person other than the tenant
3. 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
4. Insofar as any property is owned by the tenant and another person, that property will only be affected by the hypothec to the extent of the tenant's interest in the property.
However, it is not all bad news for landlords. The Bill 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).
Some of these reforms will affect rights of hypothec which were created prior to the Bill coming into force and others will only affect rights of hypothec which are created after the Bill comes into force. The Bill is not, however, clear upon when a right of hypothec should be regarded as "created". Is it when a lease is granted? When goods are deposited on the leased premises which are capable of being caught? When sums of rent fall due? These issues could be problematic for insolvency practitioners who will have the task of deciding what the value of the hypothec is.
3. Conversion to a preference on Insolvency
The Bill states that, notwithstanding the abolition of sequestration for rent, landlord's hypothec is continue as a right in security "conferring a preference in favour of landlord" on insolvency. It is effectively being converted to a pure preference.
Insolvency practitioners will have the unenviable task of applying the Bill when it becomes law. In deciding exactly what the value of a particular landlord's hypothec is, insolvency practitioners will have to have regard to a number of potentially difficult issues. In the event that an insolvency practitioner is unable to take a view, he could consider seeking directions from the Court.