Landlords still?

While 28 November 2015 might not be the first date that springs to mind when asked what is the most important day in your life so far, it was the “appointed day” in the Long Leases (Scotland) Act 2012, when the tenant’s interest under qualifying leases was automatically converted to outright ownership, and the landlord lost their ownership right.

In terms of the Act, a “qualifying lease” was one that was granted for a period of longer than 175 years, where the rent payable was £100 or less, and which had as at 28 November 2015, over 100 years to run if it was wholly or mainly residential property, and more than 175 years to run for all other property. Certain leases were excluded from conversion, namely if the premises include a harbour in relation to which a harbour authority has any involvement, or is of minerals or includes minerals and rent or royalty is payable according to the exploitation of the minerals, or if granted to allow the tenant to install or maintain pipes or cables.

Outstanding rights

A tenant was entitled to exclude their lease from being converted to outright ownership, provided they registered an appropriate notice at least two months before the appointed day. The tenant can recall the exemption at any time unless there has been an agreement with the landlord to exempt the lease, or where the landlord had obtained a Lands Tribunal order to exempt the lease.

The landlord has until 27 November 2017 to allocate cumulo rent and renewal premia in relation to two or more leases where at least one of the leases was converted to ownership under the Act; the allocation has to be reasonable. The Act defines a “renewal premium” as the amount payable to the landlord in respect of the landlord’s obligation to renew the lease after a fixed period.

The tenant is entitled to dispute the allocation made by the landlord and can apply to the Lands Tribunal to fix the amount of rent and/or renewal premium to be effective from 28 November 2015, but the application must be no later than 56 days after the date on which the landlord notifies the tenant of the landlord’s allocation.

Section 45 provides that where a lease has been converted, the former landlord has the right to serve notice on the former tenant requiring a compensatory payment to be made. The landlord must serve his notice no later than 27 November 2017, and the notice must be in the prescribed form laid down by the Act and must be accompanied by a copy of the prescribed explanatory note. If the compensatory payment is £50 or more, the notice must be accompanied by an instalment document as provided for in s 57(2). In terms of s 46 the tenant must pay the compensatory payment to the landlord no later than 56 days after the date of service of the landlord’s notice, unless payment is by instalments, in which case the instalment payments are set out in s 57.

Compensation: an unexpected twist

Section 47 provides for how the compensatory payment is calculated. If there is only a rent payable and there is no obligation on the landlord to renew in exchange for payment of a premium for the tenant, the matter is straightforward. If the lease is a partially continuing lease, the annual rent must be allocated no later than 27 November 2017 between the converted part and the continuing part of the subjects; the allocation must be reasonable in all the circumstances.

The notional annual renewal premium is calculated in terms of s 49, which applies where the renewal premium is £100 or less – the notional annual renewal premium is the amount of renewal premium payable next after 28 November 2015 divided by the number of years of the renewal period, therefore if the renewal premium is £100 and the renewal period is 50 years, the notional annual renewal premium is £2.

Section 47 sets out how the compensation payment is to be calculated, by way of a formula which produces an amount (“X”) which you then use to calculate the payment which is the sum of money which would, if invested in 2.5% Consolidated Stock at the middle market price at the close of business last preceding the appointed day, produce an annual income of a sum equal to X.

So far so good. However, the UK Government ceased trading the 2.5% Consolidated Stock on 6 July 2015, when the middle market price was £100, and it has not traded or been available since that date. The Act no doubt intended that the relevant price would be in respect of close of business on 27 November 2015, but of course the close of business last preceding the appointed day could be construed as being 6 July 2015. Interestingly, the Act does not say “close of business on the day last preceding the appointed day”.

The list of UK gilts includes only two gilts yielding 2.5% – these are 2.5% Treasury Gilt 2065 (the middle market price at close of business on 27 November 2015 was £103.07), and 2.5% Index Linked Treasury Stock 2024 (the middle market price at close of business on 27 November 2015 was £342.03). There is quite a difference between these.

The Act does not, nor so far as the writer is aware does any statutory instrument, provide for a different gilt to be used. However, the writer considers that one needs to use the last available price for the 2.5% Consolidated Stock, which would mean that effectively you multiply X by 40.

Additional payment

In terms of s 50, the landlord is entitled to serve notice at any time until 27 November 2017 claiming an additional payment, in respect of the extinction of a right. The notice must be in prescribed form and accompanied by a copy of the prescribed explanatory note, setting out the right that has been extinguished and specifying the amount of additional payment claimed and the basis on which it is calculated. Where the claim is in respect of a right to development value it must set out the basis on which the development value is reserved under the lease. If the additional payment is £50 or more, the landlord must serve an instalment document on the tenant at the same time as serving the notice. The £500 maximum provided for in s 56 applies to additional payments as well as compensatory payments.

Section 51 lists the extinguished rights in respect of which a claim can be made, and these include right to rent payable partly or wholly in non-money terms, any rights to have the rent reviewed or increased from time to time, the right to a rent that is variable from year to year, the right to receive a premium (apart from a renewal premium), and any right to resume possession of the land on expiry of the lease provided this would be before 28 November 2215 (200 years).

In terms of s 52 the extinguished right is to be valued as at 28 November 2015, and provides for the additional payment to be based on open market value of the right itself on the assumption that the lease would continue until contractual expiry. The additional payment must be made no later than 56 days after the date on which the landlord serves the additional payment notice, provided the tenant agrees to make the payment. If agreement is not reached on the amount of additional payment, either party can refer the matter to the Lands Tribunal, but this must be done no later than 27 November 2020 (i.e. within five years after the appointed day).