Legal Updates
The Bankruptcy and Diligence (Scotland) Act 2006: Land Attachment
As well as completely overhauling the system of personal bankruptcy and revamping the statutory basis for the creation of floating charges, the Act will create, in Part 4, a powerful new remedy for creditors to use against debtors who happen to own or have a long lease of property - land attachment. Section 81 of the Act states that this new diligence will be available to enforce payment of a debt of £3,000 or more, for which a decree has been obtained and a charge has been served but not complied with, provided the statutory procedures are followed, by registering a notice in both the Land Register and the Register of Inhibitions. The land attachment is effective 28 days after registration of the notice (Section 81(3)). Until then it has a similar effect to that of an inhibition. It cannot be enforced however until six months after the date of registration of the notice. As with inhibitions, land attachments will be effective for 5 years from the date of registration. Unlike inhibition however, the creditor may also have that period extended for further periods of five years. In theory therefore a land attachment can be made to remain effective forever.
The land attachment if properly registered in terms of Section 81, will have the effect of both conferring a subordinate real right on the creditor over the land attached and securing the sum referred to in the notice. It does not, however, convert any moveable debt into a heritable one. Thus land attachments cannot be used by creditors to obtain a standard security by the back door but, as will be seen below, the Act operates in such a way that the successful creditor in terms of a land attachment, ends up in an identical position to that of a heritable creditor in possession.
Attachable Land
Attachable land includes land (including buildings and other structures and land covered by water) and a long lease where the debtor is the tenant including those leases which are assignable only with the consent of the landlord (regardless of whether that consent may not be unreasonably withheld) (Section 82). If a land attachment is created over the title to, say, a retail park or a shopping centre, the landlord cannot grant leases subsequent to the date of the land attachment (Section 86). Landlords would therefore be well advised not to allow their creditors, especially those with, relatively, small sums owned to them, to get into a position of being able to register a land attachment; the effect on their income stream could be fairly devastating.
The position of purchasers under missives which have not yet been implemented (including option agreements) is not protected in terms of the Act, other than by obtaining the usual searches to disclose the existence of a land attachment. However, such purchasers can, under Section 91, after conclusion of the missives or execution of the option agreement register a notice in the Register of Inhibitions which will act like a caveat in the Courts in relation to applications for warrant sales in implement of a successful land attachment. What that notice will not do is directly alert prospective purchasers to a warrant sale application or the existence of a land attachment as prospective purchasers have no right to register such a notice. Searches in the Register of Inhibitions will disclose a land attachment in the same way as the usual notices of concern to purchasers are disclosed. Whether the existence of such notices becomes a significant issue for commercial developers and investors remains to be seen. It would appear that the advice for commercial clients who are likely to have large sums invested for quite long periods (in excess of six months - the enforcement date of any land attachment as noted above) in options to purchase land which are suspensively conditional on planning etc will be to register a Section 91 notice as soon as missives are concluded and to include within the option contracts warranties from the seller that they are not aware of any circumstances which would or might allow a creditor to register a land attachment notice.
In practice, the majority of options to purchase entered into by developers are protected by standard securities granted in respect of obligations ad factum praestandum. The specific provisions of the Act regarding the position of heritable creditors are more fully explored below. However, It is worth considering whether, given that the Act protects only monetary sums due to a heritable creditor, sums expended by developers in promoting sites via the local plan process and following the planning procedures through to a successful grant of permission, as well as the prospective development value and developer's profit could and should be specifically secured in terms of such a security. The question which remains unanswered at this juncture is whether that would be seen as an unduly onerous imposition on the landowner. It would seem that given that these costs are all legitimately incurred by the developer, there are few grounds upon which a Sheriff could be asked to strike the security down.
Warrant for Sale
Sections 92 - 98 outline the procedure by which a creditor who has successfully registered a land attachment may obtain a warrant from the Sheriff Court for the sale of the attached land. Essentially a creditor must wait six months after the land is attached and the debt must remain outstanding at that date before applying for a warrant to sell. All heritable creditors and those who have registered Section 91 Notices must be informed of the application. The Court must also appoint a chartered surveyor to report on the open market value of the property. Once the report is lodged in court, a hearing date is set. This must be intimated to all heritable creditors and any party which has lodged a Section 91 notice who then may object to the grant of the warrant to sell. It is difficult to envisage any circumstances where a heritable creditor or prospective purchaser under an option or other suspensive missives would not be best advised to become involved in such proceedings.
Section 97(3) grants the Sheriff discretion either to grant the warrant but suspend its effect for 1 year or not to grant the warrant if to do so would be "unduly harsh" to the debtor or any other person having an interest. One can only guess what the circumstances would have to be to persuade the Sheriff to suspend the effect of a warrant or to refuse to grant it in the first place. It may be that the Sheriff would not grant the order where a family with young children would be made homeless and where the debt is relatively small but it is likely to be much more difficult for a commercial landowner or prospective purchaser to persuade the Sheriff that granting a warrant to sell would cause such hardship as to make granting the order "unduly harsh". Thus a Section 91 notice may not provide prospective purchasers under options and suspensive missives the absolute protection from a creditor of the seller which they require. The solution to this potential problem is not immediately apparent, although it is possible that once the system becomes operational, the profession may treat land attachments in a similar way to inhibitions.
Section 97(6) states the circumstances where a Sheriff must refuse to grant an order. These include, where a heritable creditor has called up the security and is exercising its right to sell or the likely net proceeds of sale would not exceed the expenses of the land attachment process plus the lesser of £1000 and 10% of the sum due in terms of the land attachment. The likely net proceeds is defined in Section 97(8) as being the sum likely to be raised by the sale of the attached land (ie the open market valuation referred to above) less the sums due to a secured creditor or diligence holder ranking prior to or pari passu with the land attachment. . An interesting case may arise where either the heritable creditor or other third party with an interest in the land offers to make payment of the sums due in terms of the land attachment and the creditor under the land attachment refuses such an offer and proceeds to request a warrant for sale. Would the Sheriff then be entitled to refuse to grant an order? This remains to be seen and the Act does not specifically cover the issue. It would seem likely, given the other powers given to the Sheriff in S99, that the Sheriff would use his powers in terms of S99(2) and merely order the sale to the prospective purchaser to be completed (see below).
It should however be noted that if the Sheriff refuses to grant an order authorising the sale on the foregoing grounds, the land attachment does not cease to have effect merely because the order was refused and the creditor may make a further application for a warrant to sell. The Act is not clear on the point, but it would appear to be detrimental to the position of prospective purchasers if an existing Section 91 notice did not survive such refusal also.
Prospective Purchasers
Sections 99 and 100 grant protection from warrant sales to purchasers under contract who have either registered a Section 91 Notice and objected to the creditor's application for such a warrant or entered into the contract before the land was attached.
Section 99 deals with the situation where the purchase missives are entered into after the land was attached and the creditor then applies for a warrant to sell the land. In that case, the Sheriff may require the purchaser to pay the price due in terms of the missives to the creditor provided that the missives were not entered into by the purchaser in order to defeat the rights of the creditor and both the purchaser and the debtor will proceed to implement the missives without undue delay.
In terms of Section 100, the Sheriff may on the application of the prospective purchaser suspend the effect of the warrant for 1 year and require the purchaser to pay the price to the creditor subject to the proviso referred to in relation to Section 99 above.
Orders made under Sections 99 and 100 may be revoked on application of the creditor if there is undue delay in settling the sale and purchase.
Again the Sheriff has discretion whether to grant such orders. It would seem unlikely that, if the purchaser and seller were truly contracting at arm's length, the grounds for refusing to grant such orders would be met. Again, we will have to wait and see what practice grows up as these cases come before Sheriffs in due course. As a first step safeguard it would seem obvious that suspensive missives and options will be drafted to include appropriate termination and compensation procedures in the event that either warrants to sell are granted or the Sheriff refuses an application under Sections 99 or 100 as appropriate.
Rights of Creditor where Warrant to Sell Granted
If a warrant to sell is granted, the rights of the creditor, contained in Section 106, are fairly draconian. The debtor (and any other person deriving rights to occupy the land through the debtor) must vacate the property on seven days notice from the creditor. From that date, the creditor has the rights (and obligations) of a heritable creditor in possession other than the right to grant leases. If the debtor refuses to remove on receipt of the notice, the creditor may raise an action of ejection. It would seem unlikely that commercial landowners would allow the process to advance to this stage of proceedings before settling the sums due. However, it would seem prudent, as mentioned above, for suspensive missives and options to be drafted in such a way as to allow termination in the event of a warrant to sell being granted.
Effect on Standard Securities
The effect of the registration of a land attachment on an existing standard security is identical to that of the creation of a subsequent standard security. The debt to the secured creditor is crystallised as the present debt at the date of creation of the land attachment, subject to any future debt which the security allows the debtor to incur, interest and expenses. Therefore secured creditors must be vigilant and act on any notice which may be served on them intimating the creation of a land attachment in order to protect the value of their security. It is possible for the secured creditor and the creditor under a land attachment to enter into a ranking agreement, however, this will only happen after the land attachment is created as there is no provision for the first secured creditor's consent to the land attachment to be sought.
If the creditor in terms of a land attachment is granted a warrant to sell the attached land and a disposition is granted to a third party purchaser, on registration of that disposition the land is automatically disburdened of the land attachment and any standard security or other diligence ranking pari passu with or after the land attachment.
The proceeds of such a sale are distributed in accordance with Section 116 of the Act. In order of preference these are:
- the expenses of the creditor incurred in the sale which are properly payable by the debtor;
- any sums due to a secured creditor or diligence holder ranking prior to the land attachment;
- any sums due to (i) the attaching creditor in respect of the sum recoverable under the land attachment but not the expenses recovered under 1 above and (ii) creditors ranking pari passu with the land attachment;
- any sums due to creditors ranking after the land attachment; and
- the balance due to the debtor.
Secured creditors would seem therefore still to be in the best position in relation to other debts incurred by their borrowers, notwithstanding the new diligence of land attachment.
Termination and Recall of the Attachment
If the debtor pays the sum due to the creditor either (i) within 28 days of the service of the notice of land attachment or (ii) at any time after the land attachment becomes effective but before the contract following on the grant of a warrant of sale is concluded, the land attachment ceases to have effect (Section 121). In those circumstances, a discharge must be granted by the creditor in terms of Section122. Such discharges may be registered and this will clear the Register of Inhibitions of any adverse entry.
The Sheriff must also recall a land attachment if it is either invalid, improperly executed, has ceased to be effective or ought to be discharged by the creditor in terms of Section 123 (2). An application for such an order may be made by the debtor or "any other person having an interest" (Section 123(1)). This would seem, at first reading, to permit prospective purchasers to make such an application, provided they show the requisite interest to do so. It is not yet clear what the courts will deem to be requisite interest, we shall have to wait for the case law to start to build up for that. The recall order is to be registrable in the Land Register thus allowing the record to be cleared of adverse entries.
Conclusion
Whilst the new regime of land attachments will undoubtedly take some time to bed in, it is anticipated by the Scottish Executive that some 3000 land attachments may be registered every year. This will have a significant impact on everyday practice for solicitors and developers and investors in land will need to become very quickly aware of the way the system will affect them and their businesses.
The information contained in this article is for general information only.
For further information or specific advice, please contact the Commercial Property department.
