Community right and commercial sale

Although the right of a community to register an interest to buy land has been around for more than a decade, until recently this only applied to land that was predominantly rural, and there are few solicitors who will actually have come across a “live” community right to buy (CRTB) in practice. Now that the CRTB applies to all of Scotland, more of us may encounter these. The PSG has been considering what, if anything, we should be saying in missives to be prepared for the, admittedly rare, situations when a sale is affected by the CRTB process.

Often, when a community is interested in a piece of land or a property, it will approach the owner, and agreement is reached without using CRTB. Scottish Government’s Community Land Team, who process CRTB applications, encourage a collaborative approach, and refer to the Protocol for Negotiated Sales developed by Community Land Scotland and Scottish Land & Estates to assist community and landowner through a negotiation process.

When was the interest registered?

If an owner decides to sell their property when a community interest has been registered, the position is simple: the community’s right to buy is triggered and the statutory process starts. The owner will have received notification at the time the application was made, and the interest will be registered in the Register of Community Interests in Land (RCIL) for all to see.

Where the property has recently been sold, and a community takes steps to register interest, the statutory registration process may or may not proceed, but the new owner’s ability to deal with the property freely – other than selling it – is unaffected.

The position becomes more complicated where the community body’s application to register interest coincides with a live sale transaction. Where the community submits an application to Scottish ministers after the owner has already taken steps with a view to transferring the property, the “late application” procedure is triggered. The effect is that the right to buy itself is activated, and depending on timing, the transaction may have to stall until the outcome of the application, and the community purchase, is determined.

Late applications

Although situations where commercial property transactions are affected by a CRTB are likely to be rare, the PSG decided that it would be useful to provide wording that caters for how parties should tackle a CRTB application arising around the time of a transaction. In the majority of cases, communities register a right to buy when there is no sale or marketing taking place. However, there could be circumstances where a community becomes aware of a proposed sale which is or includes land in which they are interested, or by coincidence an application to register a CRTB is made while a sale is taking place. 

The PSG has therefore prepared a suitable clause (see panel on p 37) for how the parties to the transaction should react, and what they may or may not do. It is hoped that this clause will be included in missives as precautionary boilerplate, and in the vast majority of cases will never be required. When it is required, it sets out a fair and balanced set of steps that the parties can take, pending the outcome of the community process.

Are missives concluded?

How a late application is dealt with will depend on whether missives have been concluded between the owner and third- party purchaser before or after ministers receive the CRTB application.

When missives are already concluded, ministers must decline to consider the application on being advised of that fact (Land Reform (Scotland) Act 2003, s 39(5)). The sale to the third-party purchaser can then proceed, unaffected. The seller must provide ministers with evidence of concluded missives. It is advisable that the seller does this as soon as they are notified of the application, as it will also appear in the RCIL. Until ministers advise the Keeper that s 39(5) applies, the Keeper will not know that ministers have no choice but to decline. Where this all happens at or around completion, it is recommended that the purchaser’s application for registration of the disposition clearly indicates to Registers that missives were concluded, and s 39(5) applies. There should be a reasonably swift turnaround by the Community Land Team, so that any gap in timings should be no more than a few days. Although, at the time of writing, Registers’ policy on this point has not yet been published, it is clear to the PSG that, as the community application must be declined, there should not be a rejection by Registers, and by the time the registration application is accepted, the RCIL will have been updated.

But if missives have not yet been concluded, ministers will consider the application, to decide whether or not to register the interest. They must make their decision, and send a note of it to the community body and the owner, within 30 days of receiving the late application (44 days if additional information is sought from the owner).  

Since a “late application”, if accepted, activates the right to buy, this might not suit the community body, which may not have been aware that its application was “late” or made any funding arrangements. In those circumstances it may decide to withdraw its application.

So, it could suit the owner and third-party purchaser to wait a while to see how the community body acts, since if it withdraws the application, the original sale can go ahead. However, it would be unreasonable to expect the parties to have to wait possibly for several weeks or months, in a state of uncertainty, if they do not want to. 

Accordingly, the new clause provides two options at this initial stage. Either:

• either party can resile immediately; or
• they can wait to see if the application is refused, or withdrawn, and if it is, a new date of entry is determined (unless the original date of entry has not yet arisen).

Where Scottish ministers decide to register the application, it is still possible that it might be withdrawn or the community body decides not to proceed, or ministers later decide not to consent to the right to buy proceeding, for example if the result of the ballot shows insufficient support in the community. Again the parties might decide to wait and see what happens, but since it is now known that the CRTB has been registered, they might decide to cancel the sale at that stage. The clause gives the parties a second opportunity to resile, provided they do so before the CRTB application is withdrawn or the community body indicates that it is not going to exercise the right to buy etc. A community body now has up to eight months from the date on which it confirms to ministers that it intends to exercise the right to buy, within which to complete the purchase and pay the agreed price.

When the community succeeds

If the community body proceeds to complete the purchase of the property or relevant part, the sale to the third-party purchaser cannot, of course proceed (unless the parties are able to agree to carve out the part subject to the CRTB – see below). In that case the missives will have to come to an end, and the seller should intimate this fact to the purchaser.

If the timing is extremely unfortunate, then in a situation where, for example, there has been a same day conclusion of missives and completion coinciding with prior or same day receipt of an application by Scottish ministers, the effect of the legislation could be that the disposition to the purchaser is void. If that is the case, it may be necessary to unpick the transaction, withdraw the disposition from registration and refund money paid and received. The clause sets out a mechanism for this, the purpose being to return the parties to the financial position they would have been in, had completion of the sale not taken place.

While all this might sound alarming, it should be borne in mind that for a community application to be approved, it must meet strict criteria, including demonstrating that acquisition by the community is compatible with furthering the achievement of sustainable development, and that it is in the public interest. In the circumstances described, it is difficult to see how it could be justifiably in the public interest to unravel a completed commercial transaction.

Portions of a property

It is possible, perhaps even likely, that the property in which a community body is interested is only part of what is proposed to be sold. The purchaser and seller may be prepared to proceed with the sale, carving out the portion that the community body wishes to buy. Transfers of land which is not affected by a registered CRTB are prohibited, if the transfer also relates to land that is subject to a registered interest. Accordingly any disposition which includes both affected land and land that is not affected would be void.

How the parties decide to deal with these situations is a matter for discussion and negotiation according to the particular circumstances of the property, and the parties involved. Consequently the PSG has decided not to provide standard wording in the offer for this outcome. However, wording that might be suitable or which could be adapted according to circumstances is included in the PSG optional clauses and in the guidance notes that accompany those clauses on the PSG website. 

Being prepared 

We would emphasise that the occasions when this wording will be required are expected to be extremely rare. However we took the view that providing a reasonable and blame-free approach for the parties to adopt in such an unlikely event should take any panic out of such a situation, allow parties time to consider their options and withdraw or proceed within a timescale that suits them, or consider whether to prepare for a carve-out if that would work for all concerned. 

Wording for Community Interests

7.5 Community Interests (Clause 8.5 in the Offer to Sell Investment Property)

7.5.1 The Seller has not received any 2003 Act Notice.

7.5.2 If the Seller receives any 2003 Act Notice prior to registration of the Disposition, then the Seller will immediately:

(a) notify the Purchaser; and

(b) exhibit a copy of it to the Purchaser.

7.5.3 If the Seller receives any 2003 Act Notice (whether before, on or after Completion) which relates to an application by a community body to register an interest in the Property received by the Scottish Ministers after the Conclusion Date, the Seller will immediately:

(a) exhibit a copy of the Missives and any other information in terms of Section 39A of the 2003 Act to the Scottish Ministers to ensure that the Scottish Ministers decline to consider the application in terms of Section 39(5) of the 2003 Act; and

(b) exhibit evidence to the Purchaser of compliance with Clause 7.5.3(a).

7.5.4 If the Seller receives any 2003 Act Notice (whether on or before Completion) which relates to any application by a community body to register an interest in the Property received by the Scottish Ministers on or before the Conclusion Date:

(a) either party will be entitled to resile from the Missives without penalty on delivery of a written notice to that effect to the other’s solicitors, not later than [5] Working Days after the date on which the Purchaser has received the copy 2003 Act Notice in terms of Clause 7.5.2(b), time being of the essence; or

(b) and if the original Date of Entry has passed because the Seller and the Purchaser have been prevented by the 2003 Act Notice from taking any further steps to transfer the Property, then, subject to Clause 7.5.4(c), the Date of Entry will be the earlier of [5] Working Days after the date on which:

(i) the Scottish Ministers decide not to enter the community interest in land to which the 2003 Act Notice relates in the RCIL;

(ii) the community body withdraws the application to which the 2003 Act Notice relates;

(iii) the Scottish Ministers receive written notice from the community body that it will not exercise the right to buy the land; and

(iv) the Scottish Ministers decide not to consent to allow the right to buy to proceed;

(c) and if the Scottish Ministers decide to enter the community interest in land to which the 2003 Act Notice relates in the RCIL either party will be entitled to resile from the Missives without penalty on delivery of a written notice to that effect to the other’s solicitors, prior to the date on which either:

(i) the community body withdraws the application to which the 2003 Act Notice relates; or

(ii) the Scottish Ministers receive written notice from the community body that it will not exercise the right to buy the land; or

(iii) the Scottish Ministers decide not to consent to allow the right to buy to proceed;

(d) and if the community body completes the purchase of the Property then:

(i) the Missives will automatically terminate on completion of the sale of the Property to the community body; and 

(ii) the Seller will notify the Purchaser that the Missives have terminated immediately.

7.5.5 If the Disposition is of no effect by virtue of the 2003 Act then within [5] Working Days of the date on which this is established:

(a) the Seller will pay to the Purchaser:

(i) the Price (and any VAT on the Price); and

(ii) all sums properly expended for rates, utilities, insurance, service charge expenditure and other outgoings for the Property in the period from (and including) Completion;  

(b) and, in exchange, the Purchaser will:

(i) withdraw its application for registration of the Disposition and within [5] days of receipt deliver it to the Seller; and

(ii) pay to the Seller any sums received by the Purchaser for rent and any other sums received in its capacity as owner of the Property in the period from (and including) Completion; and

(c) the Seller and the Purchaser will co-operate with each other and do such acts and things, execute such deeds and documents and deliver such documents and evidence as may be required to return the parties to the position in which they were before Completion.