A bold step forward

At long last we will soon have the long-awaited reform of the Land Registration (Scotland) Act 1979. The Registers of Scotland and the Scottish Law Commission are to be congratulated for undertaking such a much-needed and comprehensive review of our land registration system.

The Land Registration (Scotland) Bill was introduced into the Scottish Parliament on 1 December 2011 and it is anticipated that it will be enacted by summer 2012 although it will not be brought fully into force until 2014. This is to allow time for the Keeper and her staff to carry out the extensive technical upgrades and other work necessary to ensure that the changes are fully supported. It is entirely appropriate that this be the case, (a) for financial and staffing reasons; and (b) so that we do not experience the sort of false starts that we have had with Automated Registration of Title to Land (“ARTL”).

The authors have always been supporters of the e-registration project since its inception. (See the Joint Professorial Opinion on the subject of the property law issues arising from ARTL – 2005 Juridical Review 201; and Conveyancing in the Electronic Age, W. Green & Son). ARTL was a major initiative which has been affected by IT and other challenges as well as the economic slowdown and resulting drop in activity in the housing market. Nevertheless, the principles behind ARTL remain sound and the statistics remain impressive for something that is such a radical change to traditional working methods. See www.ros.gov.uk/artl

The bill has had a long gestation and opinion has been canvassed widely. Reform is very much needed and the bill will certainly represent a major step forward and an essential development to build upon the reform of the feudal system etc. (For more information on the bill, see Gretton, Journal, March 2010, 22, and the Keeper's interview, Journal, January 2012, 10.)

There are many positive initiatives in the bill: for example a more efficient system for registering securities, and improved mapping procedures. These and other such reforms will greatly improve efficiencies and, as a result, will decrease transaction times and legal costs. The purpose of this article is to consider two of the proposed reforms and their likely impact on conveyancing practice.

Closing the gap

Delivery of a disposition in exchange for payment of the price in a conveyancing transaction does not, of itself, confer a real right. Only registration does that. (See Sharp v Thomson 1997 SC (HL) 66, and Burnett’s Trustee v Grainger 2004 SC (HL) 19.) Accordingly, the so-called “race to the register” dictates that the first person to acquire a real right by way of registration prevails. (See also Ceres School Board v McFarlane (1895) 23R 279.) There is, however, an attendant risk caused by the brief delay between delivery of the deed and its registration. This has come to be known as the “gap risk”. That risk can be divided into (a) the risk that the granter is sequestrated, put into liquidation etc.; and (b) a risk that the granter grants a competing deed to another party and that deed is registered first.

In addition, there is also a short gap between the date of the search in the registers on which the grantee relies and the actual date of settlement. This gap has been reduced considerably in recent years and, if using ARTL, the gap is virtually removed altogether. Nevertheless, the gap still exists. As stated in para 14.2 of the Report of the Scottish Law Commission (no 222) on Land Registration (www.scotlawcom.gov.uk/publications/reports), “Efficient conveyancing can cut down these two gap elements but experience shows that it is hardly possible to eliminate the problem altogether.”

As mentioned above, the introduction of ARTL along with the effect of s 17 of the Bankruptcy and Diligence (Scotland) Act 2007 have also helped reduce the gap risk, but they do not provide a complete solution.

The gap risk has traditionally been covered by the seller’s solicitor granting a letter of obligation which, if in “classic” form, constitutes a personal guarantee by the granter’s solicitor. In recent years, solicitors have, quite rightly, questioned why they should provide such a guarantee to make the conveyancing system operate more efficiently. As Professor Rennie has said, the letter of obligation is effectively the oil that lubricates the system and enables it to work.

In England & Wales, it is possible to obtain an “official search with priority”, which provides a protected period of 30 business days (a period equal to 42 days). Under that system, the use of advance notices is optional but they are widely accepted as part of the conveyancing process as they afford a degree of protection to purchasers. A registered advance notice involves a notice being placed on the register stating that the owner (A) is intending to grant a deed to a second party (B). This notice does not confer a real right on B. What it means is that if a deed is, in due course, granted to B and that deed is registered, then anything in the Land Register in favour of another party (C) that is registered between the date of the advance notice and the date of the registration of the deed in favour of B is postponed to the said deed in favour of B – the advance notice being capable of being seen on a search of the register carried out by a prospective purchaser.

A recommendation for reform to the Scottish system to deal with problems associated with floating charges was suggested a number of years ago. (See Greens Property Law Bulletin, issue 45 at pp1-3). In response to calls for reform of the system generally from the Law Society of Scotland amongst others, the Scottish Law Commission carried out an investigation into possible reform. This involved a consideration of the systems of advance notices used in England & Wales and in Germany. (See Scottish Law Commission Discussion Paper 130 and the aforementioned Report on Land Registration.)

Official protection

A brief outline of the proposed reforms is as follows:

• An advance notice may be registered whether or not there are antecedent missives.
• It is recommended that the advance notice system will apply only to properties already registered in the Land Register. Scottish Ministers will, however, have power to extend it to first registration.
• The bill does not specify the form of an advance notice which, in practice, is likely to be electronic. It will be possible to lodge the notice in paper however. It is expected that the exact form of the notice will be regulated by rules to be promulgated by Scottish Ministers.
• An advance notice would normally be granted by the party named as proprietor in the title sheet but third parties, who are not heritable proprietors but who can validly grant the deed in question, may also register an advance notice. It is also recommended that the notice can be granted by any other person, so long as the notice bears the consent of the person who could validly grant the deed in question. This accords with the German approach. In a standard conveyancing transaction, the missives will require to provide for an advance notice to be applied for.
• Advance notices will enter the application record in the Land Register and would not be registered in the title sheet. Unlike at present, the application record will be one of the four recognised parts of the Land Register if the recommendations of the Scottish Law Commission are followed. See SLC Report, paras 4.9 and 4.35.
• The Scottish Law Commission recommended that the advance notice would subsist for a period of five weeks (35 days) – not “business” days. The bill envisages that the period can be varied by secondary legislation.
• It is recommended that the protection afforded by advance notices should extend to entries in the Register of Inhibitions that appear within the protected period.

In broad terms, an advance notice would cover the risks covered by a typical letter of obligation. It is not envisaged that it would protect against a notice of potential liability for costs and other possible exceptions as may be listed by Scottish Ministers.

It is suggested that the introduction of advance notices in Scotland is long overdue. Under the proposed system, there would still be a “race to the register”. Under that system the first person to register would prevail “but with the possibility of the result being changed if that registration happened during the currency of a notice in favour of another person” – SLC Report, para 14.49.

Conveyancing practice would obviously require to change. The prospective grantee will require to ensure that the advance notice is entered on the register a reasonable time before the intended settlement date. Then immediately prior to settlement, the register can be checked to confirm the entry of the notice, to confirm that no competing deed has been registered (as now) and to confirm that no potentially competing advance notice has been entered.

The new system will be relatively straightforward to operate and will be of considerable benefit both to the legal profession and to members of the public alike. Assuming a clear search, the transaction can be settled and the deed in favour of the grantee registered without fear of challenge. In a normal conveyancing transaction, it is possible that there would potentially be two advance notices – one in respect of the disposition and the other in respect of any standard security. This is seen as being a low cost solution to the potential harm caused by the gap risk – especially where the letter of obligation, for whatever reason, does not provide an assurance. Nevertheless, there are advantages to legislation making it clear that only one notice should be necessary.

It is hoped that letters of obligation will become redundant. They have served their purpose and should be laid to rest.

Waiting for e-missives

The E-Commerce Directive (2000/31/EC) remains unimplemented in Scotland and, for that matter, the rest of the UK. It was supposed to be transposed into domestic law by member states by 17 January 2002. Article 9 of the directive provides that member states must ensure that their legal systems allow contracts to be concluded by electronic means. There is, however, an exception with regard to contracts that create or transfer rights in real estate, except for rental rights.

The view taken in the professorial opinion was that the directive used the word “contract” in a broad continental sense of a consensual juridical act. Accordingly, the exception covers only deeds such as dispositions rather than missives. If that view of matters is correct, then digital missives have been competent, as far as EU law goes, since 17 January 2002. In reality, domestic Scots law does not currently permit digital missives despite the fact that they are arguably more secure than written missives or papers sent by fax. This position is to be rectified by the bill.

There is no doubt that it is in some ways inconsistent to have a conveyancing transaction which, where the title to be transferred is registered, allows transfer of title electronically by use of digital deeds and digital signatures but does not allow the earlier and contractual part of the transaction, namely the missives, to be concluded in this way.

Currently, formal missives do, of course, still have to be exchanged, a point reinforced by the case of Park, Petr 2009 SLT 871. The reform will greatly improve the efficiency of the sale and purchase transaction and bring it into line with other transactions that we all regularly complete online these days.

Digital signatures

The term “digital signature” is in many ways a convenient tag for the authentication of a document by electronic means. There are of course machines which allow one to trace a signature which appears on a screen. That is not what would be regarded as a digital signature in a technical sense, however. The crucial element is not the signature itself but the digital certificate which provides the security for the adhibition of the signature. Put simply, the certificate is used to create the digital signature which is a product of the actual document and the digital certificate together.

As a general rule, the longer the key length, the stronger the encryption. The ARTL digital certificate contains a key of significant length which is very secure compared to others which are currently in use. It currently is of a length of 1024 BITs and the root certificate for the whole ARTL public key infrastructure has keys which are 2048 BITS long. In the not so recent past a digital certificate with a key length over 56 BITS was classed as a military weapon for export purposes and special licences were required for export.

What is important is the strength of the certificate, not the fact that someone has a digital signature. The point here is that there is a digital authentication process already in place with Registers of Scotland and it is argued that that certificate should be extended for use in verifying e-missives. Initially the Keeper was of the view that such use of the ARTL digital signature was ultra vires. That problem has been removed by the bill, however.

Before the benefits of electronic transactions can be enjoyed however, it is essential that appropriate safeguards are put in place in order to protect consumers and to mitigate the opportunities for fraud. Consultation is, of course, required but that need not be a lengthy process. If it were to be, questions should rightly be asked as to why. The Law Society of Scotland had to consider this very point prior to ARTL going online. This involved a suite of practice rules and regulations being promulgated. (See now Consolidated Practice Rules, rule B8.2).

Work has started on the equivalent rules that will be required in order to facilitate e-missives. It is anticipated that this task can be completed quickly as there is no other reason why the relevant provisions in the bill cannot come into force sooner rather than later. It is suggested that that is exactly what a modern society requires. Scotland would be the first country in the UK to implement the EU Directive and this could have considerable economic benefits.

It will, of course, be necessary to issue solicitors with a digital signature facility – most likely for a modest fee. As mentioned above, Registers of Scotland have already gone through this process and have a perfectly acceptable and robust digital authentication process for use in ARTL. What then is there to stop practitioners using the ARTL digital signature? The authors can see no reason why this should not be possible.

In the ideal world, the Law Society of Scotland would issue a digital signature as part of an electronic practising certificate. It is understood that plans are in hand to introduce an electronic practising certificate in October 2013 and that that certification will contain an authorised digital signature facility. One must wonder why we must wait until October 2013, however, when a perfectly suitable facility within the ARTL process is available now? Have we considered the consumer in this or are we looking to introduce something that suits our plans? In the end of the day, the Society may well move to issue a digital certification process as part of an electronic practising certificate. That should not be a reason for delaying the introduction of e-missives to those involved in Scottish property transactions, however.

A catalyst?

Once available, e-conveyancing (in its fullest extent) will make property transactions cheaper and quicker to complete. We have standard clauses. Why can’t we have the facility to conclude contracts without paper? Such a facility may not speed up the negotiation of missives which, on many occasions, for many (often oblique) reasons can become very lengthy. It might just act as a catalyst, however, and we might get back to a situation last seen in the 1970s when missives were often concluded in a short period of time and on a de plano basis. Is that perhaps wishful thinking on the part of the authors: a hankering back to times long since gone? Perhaps it is. We would like to think, however, that that is not the case. Tempus fugit!