Is your option to acquire land protected?

The Scottish Law Commission has published proposals for a new form of protection for holders of options over land.

18 August 2023

Instead of buying a piece of land for development outright, it is quite common for developers to take an option to acquire land from the landowner at some date in the future - conditional on the developer managing to obtain planning consent for development of the land, for example.

Such an option gives the developer a contractual right to buy the land in the future, provided the necessary approvals are obtained, but does not bind them to do so, if consents are not forthcoming.

Option arrangements will often be in place for a number of years, as planning and other conditions can take a long time to procure.

As such options are only contractual, and there is nothing to stop a landowner from selling the land to someone else, in breach of the option arrangement, it is traditional practice for the developer to be given a standard security over the land, to secure performance of the landowner's obligations under the option agreement.

The standard security is registered against the title to the land, providing a visible flag on the title to alert third parties to the existence of the option.

Such security arrangements are an imperfect solution however, as standard securities are principally designed to secure monetary debts, not obligations to transfer land.

A creditor in a standard security has rights to enforce it by selling the land if the debtor is in breach, but that is of little benefit when what the developer wants is the land itself.

Under the current law, the best they may be entitled to is damages for loss.

Although the existence of this type of standard security is visible on the property register, the effect of this visibility on third-party competing deeds is less clear.

Such deeds may be subject to challenge by the option holder due to the so-called "rule against offside goals" by which a competing acquirer in these circumstances is in bad faith by having awareness of a pre-existing contract.

 There is a lack of certainty in the law in this area, but it is the best route available as it currently stands.

A potential solution?

As part of its review of the law of heritable securities in Scotland, the Scottish Law Commission has been investigating possible solutions to this quandary.

In their Discussion Paper on Heritable Securities – Non-monetary securities and sub-securities (DP No. 175) they put forward a proposal for a new type of notice – provisionally called a conditional advance notice – that may provide a developer (and others entering into similar arrangements) with a greater level of protection against a competing transfer of the land to a third party, than currently exists.

The scheme proposed would broadly work like this:

  • At the time of entering into the option arrangement, the landowner would register a notice against the title to the land, the effect of which would be to give priority against any intervening deeds that compete with the deed that is to transfer the land to the developer.
  • The notice would stay on the title for a fixed period – five years is suggested (with the possibility of seeking an extension), during which if the landowner deals with the land in breach of the option agreement, that dealing could be reversed.
  • The existence of this priority period for the disposition to the developer would be visible on the title to the land, thus deterring any third party from acquiring the land without insisting on having the notice discharged.
  • A discharge of the notice would only be possible with the written consent of the beneficiary (in our example the developer).
  • Not only would the deed to the beneficiary of the notice be protected, so too would performance of the obligation to deliver that deed to the beneficiary.

Have your say on reform of options over land

These proposals are worthy of close consideration.

While still in rough outline, their implementation would provide an overt mechanism capable of enabling the acquisition of the land as originally intended: a considerable improvement on the current enforcement options.

Taking a standard security could still be used where the obligation being secured is payment of money.

The Scottish Law Commission is consulting on these and other proposals in the Discussion Paper and seeks views from interested parties on the detail of their proposals by 29 September 2023.

If you wish to discuss the proposals or would like advice on making a response, please do not hesitate to contact Shepherd and Wedderburn's top ranked real estate team.