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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Conversion of Long Leases (Report) [2006] SLC 204(9) (December 2006) URL: http://www.bailii.org/scot/other/SLC/Report/2006/204(9).html Cite as: [2006] SLC 204(9)

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PART 9: RESIDENTIAL GROUND LEASES

Introduction

9.1      "Ground lease" is a convenient term, although not a technical one. As its name suggests, a ground lease is a lease of bare ground - of land not yet built on. In a ground lease the landlord supplies the land and the tenant the buildings; and the rent is attributable to the former but not to the latter.^[1] Ground leases are invariably long, and sometimes ultra-long, in duration. For all of the nineteenth century and for some at least of the twentieth, they were used for the building of dwellinghouses. However, the Land Tenure Reform (Scotland) Act 1974 prevented the creation of new residential long leases,^[2] so that where ground leases are granted today they are invariably of a commercial character. In this part of the paper, however, we are concerned exclusively with residential ground leases.

9.2      In 1954 there was introduced a statutory right to convert residential ground leases into ownership, on payment of compensation to the landlord. The Long Leases (Scotland) Act 1954 applied to all residential leases granted before 10 August 1914 for a duration of at least 50 years.^[3] The date marked the passing of the Entail (Scotland) Act 1914, which removed the final obstacles to the granting of feus. Thereafter any ground lease would have been entered into as a matter of choice rather than necessity.^[4] The Act substantially followed the recommendations of the Guthrie Committee.^[5] The scheme introduced by the 1954 Act was a form of compulsory purchase, at the option of the tenant. A tenant who wanted to buy served a notice in the statutory form.^[6] This had to be done within five years of the commencement of the Act.^[7] Thereafter the landlord was bound to grant a feu contract, on payment of compensation calculated according to a statutory formula.^[8] After 1959 the right to buy ceased to be available, although the legislation remained on the statute book until repealed by the 2000 Act.^[9]

9.3      The take-up of the 1954 Act scheme seems to have been patchy, and such figures as are available point to regional variations. In Moray, for example, 141 of the 361 surviving leases were converted between 1954 and 1959, whereas in Dumfries the corresponding figure was a mere 2 out of 793 leases.^[10] No doubt one reason for the difference was the far larger number of leases in Moray which were close to expiry.^[11] Leases came to an end for other reasons as well. Many were converted by agreement, either before 1954 or after 1959.^[12] Those which were not converted will often have expired. The political impetus behind the 1954 Act was the fact that many leases granted in the second half of the nineteenth century were on the point of coming to an end.^[13] They were kept alive artificially, by temporary legislation passed in 1951,^[14] pending the report of the Guthrie Committee. Thereafter they were either converted under the 1954 Act or have now expired.^[15] New residential ground leases, uncommon in the postwar period,^[16] ceased to be competent altogether in 1974. It seems doubtful that there are many of the shorter ground leases left. Most ground leases which survive today are likely to have been granted for 999 years or other periods amounting to quasi-alienation,^[17] and as such will fall to be converted automatically under the scheme for ultra-long leases set out in the earlier parts of this report. With the enactment of that scheme the history of residential ground leases in Scotland would be substantially at an end.

9.4      Nonetheless some leases would remain. We have tried to make an assessment of the number of residential ground leases still in existence today but which would not qualify for conversion under the scheme for ultra-long leases. That scheme is intended to apply to all leases granted for more than 175 years, provided that there is an unexpired duration of 100 years.^[18] Our survey of some 2,500 leases disclosed only 46 granted for more than 50 but less than 175 years and which might plausibly be regarded as residential.^[19] To those must be added the small number of leases originally granted for longer than 175 years but which would be excluded from the conversion scheme because of a relatively short unexpired duration. Overall this suggests that fewer than 2% of all registered leases fall into this category, and that the absolute number of such leases is probably a matter of hundreds rather than thousands.

9.5      Our survey is of course incomplete in a number of important respects. It is confined to four out of the 33 registration counties in Scotland, although two of those (Ayr and Lanark) are thought to have the highest incidence of registered leases.^[20] It covers only such period as the counties have been operational for the purposes of the Land Register - a period which ranges from nineteen years (Renfrew) to only three (Ayr).^[21] And it omits both those leases which have never been registered and also those which, although registered, saw no activity during the period under scrutiny.^[22] As we stated in our discussion paper, any conclusions based on such a survey are speculative and subject to challenge, and we asked for further information and help.^[23] No new information, however, was brought forward by consultees and our figures were not challenged.

Protection of tenants

9.6      From time to time it has been suggested that the 1954 Act ought to be revived to allow the conversion of remaining residential ground leases or that a new conversion scheme should be introduced.^[24] A possible model for such a scheme was set out in the discussion paper.^[25] An alternative method of protection would be to confer security of tenure. For example, residential ground leases could become assured tenancies under the Housing (Scotland) Act 1988. On expiry of the contractual lease the tenant would then continue undisturbed for as long as he chose to remain in the property.^[26] Alternatively the duration of the lease could be extended for a fixed period (such as 50 years).

9.7      In this part of the report we consider whether protection is required in respect of the small number of such leases which will not be covered by our scheme for ultra-long leases.

The case for protection

9.8      Loss of a home. In the discussion paper we set out a number of arguments which seemed to support the introduction of a conversion scheme or some other form of protection.^[27] By far the strongest is the consideration that, at the end of a ground lease, the tenant loses his home while the landlord merely realises an investment. An investment can be compensated with money. A home cannot. A scheme for conversion or security of tenure, against payment of money, would be a means of giving the home to the tenant while continuing to realise an investment for the landlord. Arguably that is the right way round. It is the length of the lease which turns a house into a home, just as it is the presence of the home which marks residential ground leases out from ground leases taken for commercial purposes. In leases of short duration the landlord might intend to re-occupy the property himself or through a member of his family. In that case the house is as much the home of the landlord as of the tenant. But once a lease passes the 50 years required by the 1954 Act, the landlord's interest is likely to assume a monetary form.

9.9      To some extent this argument is self-defeating. If a landlord is content with money rather than the eventual return of his property, he will be willing to enter into a voluntary arrangement with the tenant. In that case a statutory scheme is unnecessary. But in practice not all landlords are content to give up their property, particularly if the property forms part of a larger estate the integrity of which they wish to protect.

9.10      Absence of alternative accommodation. Ground leases tend to be concentrated in particular areas, often reflecting the practice of a particular estate in the disposal of property. If a lease comes to an end and the tenant loses his home, there may be no alternative accommodation in the immediate vicinity. This may be especially the case in certain rural areas where accommodation is scarce. If so, the tenant will have to leave, not merely his home, but also the neighbourhood, with obvious implications for employment and for domestic life. Whether this problem is at all common in practice is unclear. Although views were invited in our discussion paper,^[28] no information was received.

9.11      Comparison with other leases. An ultra-long lease would be converted into ownership, under the scheme proposed earlier. A short lease of a dwellinghouse might attract security of tenure, whether as a protected tenancy under the Rent (Scotland) Act 1984, a secure tenancy under the Housing (Scotland) Act 1987 or as an assured tenancy under the Housing (Scotland) Act 1988. The leases with which we are concerned here, however, are unprotected. They are too short to qualify for conversion into ownership, but have too low a rent, usually, to qualify for security of tenure.^[29] The rent is low because, in a ground lease, it is attributable to the land and not to the buildings. The result is that the tenant has no right to stay on at the end of the lease, whether as owner under a conversion scheme or as tenant under a statutory tenancy.

9.12      No compensation for improvements. Once a lease expires, not only must the tenant leave the property but usually there is no entitlement to compensation for improvements. Most improvements - and certainly buildings - accede to the land and so become the property of the landlord. At the end of the lease they must be left behind, unless they qualify as trade^[30] or agricultural^[31] fixtures. Nor is there a claim in unjustified enrichment, for a tenant is deemed to have carried out the improvements for his own benefit during the period of his tenancy.^[32] It is true that the position can be altered by agreement in the lease, so that a lease which contains no provision on the subject must be taken as having accepted the position as laid down by the general law.^[33] And it is also true that the general law applies to all leases and not merely to ground leases. But in ground leases the improvements include a house, often of considerable value, and the loss to the tenant is correspondingly greater.

The case against protection

9.13      The discussion paper listed a number of other factors which argue against the introduction of special protection for tenants holding under a residential ground lease.^[34]

9.14      Justified expectations. If the original parties are still in place, then the lease is a consensual contract, freely entered into; and if, as almost always, the parties are successors, they are subject to rights and obligations which they have chosen to assume. In acquiring a lease a tenant buys with his eyes open. In most cases he will have had the benefit of legal advice. The price will have reflected the terms of the lease. A lease which has only twenty years to run and allows no compensation for improvements is worth much less in the market place than a lease with an unexpired duration of 900 years. The house, which will soon return to the landlord, was not built by the tenant but by some, usually remote, predecessor. In short, the tenant has received what he paid for, no more and no less. The same is true of the landlord. The property was bought subject to the lease, and the price paid will have been determined largely by the length of the unexpired term. In summary, each party to the lease has certain expectations, based on its terms. The law should hesitate before it interferes with such expectations, and with the established rights of parties.

9.15      This argument may seem to have less force in a case where the lease has passed down a family without ever being exposed on the open market. At the least there may have been genuine misunderstandings. For if a house has been in the family for 100 years it may be natural to assume, without inquiry, that the present arrangements are permanent in nature. And that belief may have been reinforced by the words and actions of the current landlord. The distinction between lease and ownership, so apparent to the lawyer, is not always so clear to a person living, virtually rent-free, in a house. It is noteworthy that the 1954 Act scheme, while not generally available to those acquiring the lease after 10 May 1951, made an exception for acquisition by inheritance.^[35] No doubt, however, social and economic change means that cases of houses passing down families are increasingly rare. And in any event there are difficulties in saying that a person who acquires by inheritance and without payment is more deserving than a person who pays for what he receives.

9.16      Previous opportunity. A right to convert ground leases into ownership was conferred by the 1954 Act. There was thus a previous opportunity during the period from 1954 to 1959. On one view, the opportunity should not be renewed.^[36] The force of this argument, however, is weakened by the fact that a significant number of the leases now surviving were granted after 1914 and hence would not have qualified under the 1954 Act scheme.

9.17      Cost to the tenant. A conversion scheme could not be free.^[37] The landlord would be deprived of his property, including property in the house. Compensation would need to be paid in return. The discussion paper examined various ways in which such compensation might be calculated.^[38] Necessarily, the level of compensation increases as a lease approaches its end, so that in its final years the amount payable is likely to be substantial.

9.18      The introduction of security of tenure would, equally, raise issues of compensation, whether in the form of increased rent or a one-off payment. In England and Wales the 50-year extension allowed for leases under the Leasehold Reform Act 1967 is accompanied by an increase in rent to the level of a modern ground rent.^[39] The equivalent extension for leases of flats involves payment of a premium.^[40] In Scotland the conversion of ground leases into assured tenancies would result in a sharp increase in rent.^[41]

9.19      For many tenants payment of a lump sum or an increased rent might be either unattractive or impossible; but in that case a scheme for conversion or security of tenure would confer no benefit. Our survey gives some indication of the unexpired duration of leases of the kind under consideration, and hence of the likely levels of payment required. One third of the leases had either expired and were continuing, if at all, by tacit relocation, or had less than 10 years to run. A further one fifth had less than 40 years to run.^[42] Although the sample is too small to be reliable, the figures are instructive nonetheless.

9.20      Escalation of compensation for voluntary conversions. Conversion already occurs on a voluntary basis, although we have no information as to its frequency. A worry expressed by the Guthrie Committee was that the introduction of a statutory scheme might drive up the levels of compensation typically asked for in voluntary conversions.^[43] In a voluntary conversion, the landlord might be disposed to be generous. He may know the tenant well. Sometimes the tenant is his employee. The tenant's family may have occupied the house for many years. They may have carried out, and paid for, major improvements. And so on. The Guthrie Committee found that conversion often took place on generous terms. A statutory scheme, however, could take no account of factors such as those just mentioned. Instead the transaction would have to be viewed purely on a commercial basis. If this increased the going rate for compensation, the tenant would be in a worse position than before.

Results of consultation

9.21      Consultation on these arguments produced a mixed message. A bare majority of those who responded were in favour of some form of protection for tenants of residential ground leases. Some consultees were strongly opposed. Others were doubtful. The bodies representing the two branches of the legal profession declined to express any view on a matter which they saw as "one of policy rather than law".^[44] The Law Society of Scotland regarded this as "a matter for decision by Parliament following upon detailed consideration as to whether cases are occurring where landlords are abusing their position".

9.22      The main arguments in favour of protection were thought to be the tenant's loss of a home and of the value of improvements. The argument most often mentioned against protection was that the tenant acquired with his eyes open and should not be given a windfall benefit. That was the view, for example, of the Centre for Research into Law Reform of the University of Glasgow:

"The centre are of the view that legislative provision would not be justified unless there were a significant number of leases of this type. The centre have no empirical evidence as to the number of leases which may exist but it may be doubted whether there will be any ground leases where it is the original tenant who is still in occupation having expended the money on construction. There seems little justification for extending the [conversion] provisions to shorter leases in cases where an assignee has taken the tenant's interest in the full knowledge that the lease has a relatively short time to run. In cases where an assignee has acquired a dwelling house without knowledge as to the duration of the lease there will be a claim against the solicitor who acted."

One consultee queried the justification for favouring residential leases over commercial leases. Another emphasised that, with the introduction of short tenancies in 1980 and short assured tenancies in 1988,^[45] there was often no security of tenure in the private rental sector. It was wrong, therefore, to regard tenants of ground leases as uniquely unprotected. On the contrary, many tenants were unprotected as a matter of deliberate government policy.

9.23      Among those who favoured protection there was no agreement as to which scheme should be adopted. Security of tenure, supported by a majority, was criticised by others as merely deferring the problem. A conversion scheme, though a complete solution and attracting some support, was criticised as unduly cumbersome.

9.24      A notable omission from the responses was any indication of the scale of the problem, or even an indication that there was a problem at all. Only one consultee cited a particular case, while others referred to the need for further research.

Evaluation

9.25      In the light of the response on consultation we have concluded that we should not pursue the subject of residential ground leases further, at least as part of the present exercise. Two factors have influenced us in particular.

9.26      One is the lack of information.^[46] Before a problem can be solved it must first be identified. It may be that there is a problem in relation to shorter ground leases; but if so it has not been sufficiently uncovered for a solution to be devised. Our best guess, on the basis of our own empirical work,^[47] is that the number of residential ground leases still in existence is less than 1000, that a significant number of these have either expired and are continuing by tacit relocation or are within a few years of expiry, that the current tenant is a successor (and often a remote successor) of the original tenant and did not build the house currently standing on the land, and that in most cases the tenant acquired by purchase and not by succession. If these suppositions are accurate, a legislative solution would not seem an appropriate or a proportionate response. By way of contrast the Leasehold Reform Act 1967 was estimated to affect 1.25 million leases in England and Wales.^[48]

9.27      The other factor was mentioned by some of our consultees and is mentioned again in an article by Professor Robert Rennie. Any recommendations on residential ground leases would, in Professor Rennie's words, "go well beyond general law reform and into the field of social policy".^[49] We share the misgivings which this comment implies. The position would be different if consultation had revealed clear agreement both on the problem and on its solution. But in the absence of such agreement it is not for us to commit scarce resources on proposals of our own devising which may turn out to be unattractive to the Scottish Executive and to Parliament.

9.28      In reaching this conclusion we do not rule out a legislative scheme altogether. It may yet turn out that, for reasons of hardship or otherwise, tenants under residential ground leases are more worthy of protection than tenants under other types of lease. If so the conversion scheme sketched in our discussion paper might serve as a possible model. But the case for special treatment has still to be made.

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Note 1   Guthrie Report paras 28 and 29. The position may be much the same where the landlord supplies the buildings but the tenant pays for them by means of initial grassum (premium). There too the rent may be attributable to the land alone.    [Back]

Note 2   Land Tenure Reform (Scotland) Act 1974 ss 8–10. This inserts an implied term into all leases of more than 20 years to the effect that no part of the property is to be used as a private dwelling-house.    [Back]

Note 3   Long Leases (Scotland) Act 1954 s 1(1). The Act did not distinguish between ground leases and other leases, but in practice almost all leases which satisfied the stated criteria would have been ground leases. Compare here the definition of "tenant-at-will" in s 20(8) of the Land Registration (Scotland) Act 1979.    [Back]

Note 4   Guthrie Report para 68(2)(i). And see also para 1.7.     [Back]

Note 5   See paras 1.4 and 1.8 .    [Back]

Note 6   1954 Act s 1(1) and 6.    [Back]

Note 7   1954 Act s 1(2).    [Back]

Note 8   1954 Act ss 7 to 14.    [Back]

Note 9   2000 Act, sched 13.    [Back]

Note 10   These figures were made available to us in 1977 by Registers of Scotland. They include a small number of voluntary conversions from the same period. An article published in 1959 commented that "There is no evidence that the Act has so far been taken advantage of on any very extensive scale": see J G Mitchell, "Some Notes on Long Leases" (1959) 2 Conv Rev 186, 188.    [Back]

Note 11   Unexpired duration is given in column 6 of the table in appendix II to the Guthrie Report.    [Back]

Note 12   Guthrie Report paras 38 and 57–67.    [Back]

Note 13   Guthrie Report para 7.    [Back]

Note 14   Long Leases (Temporary Provisions) (Scotland) Act 1951.    [Back]

Note 15   Some, however, may have been kept in existence by tacit relocation.    [Back]

Note 16   Guthrie Report para 41.    [Back]

Note 17   As mentioned at para 1.4 the survey of all search sheets in the Register of Sasines for the period 1905-51 which was carried out for the Guthrie Committee disclosed 13,151 surviving long leases of which around two thirds were thought to be of ultra-long duration. See Guthrie Report paras 38 and 40. Our own survey produced similar results: see appendix C para 11.    [Back]

Note 18   Paras 2.13–2.21.    [Back]

Note 19   Appendix C paras 21 and 22.    [Back]

Note 20   Guthrie Report appendix II.    [Back]

Note 21   The survey was carried out in 2000.    [Back]

Note 22   In the absence of activity, such leases would remain in the Register of Sasines.    [Back]

Note 23   Scot Law Com DP No 112 para 4.4.    [Back]

Note 24   For example, this suggestion was made in some of the responses to our Discussion Paper on Leasehold Casualties (Scot Law Com DP No 102, 1997).    [Back]

Note 25   Scot Law Com DP No 112 paras 4.23 ff.    [Back]

Note 26   A successor would not generally be protected, however. See Housing (Scotland) Act 1988 s 18 and sched 5 part I (ground 7). Other grounds for repossession, both mandatory (part I) and discretionary (part II), are set out in sched 5.     [Back]

Note 27   Scot Law Com DP No 112 paras 4.6–4.12.    [Back]

Note 28   Scot Law Com DP No 112 para 4.8.    [Back]

Note 29   In practice the statute which is most likely to be applicable is the Rent (Scotland) Act 1984. But by s 2 of that Act the rent must be at least two thirds of the rateable value of the property on 23 March 1965. See eg Fennel v Cameron 1968 SLT (Sh Ct) 30.    [Back]

Note 30   Brand's Trs v Brand's Trs (1876) 3 R(HL) 16.    [Back]

Note 31   Agricultural Holdings (Scotland) Act 1991 s 18. In fact this provision suspends the operation of accession.    [Back]

Note 32   Wallace v Braid (1900) 2 F 754; Dollar Land (Cumbernauld) Ltd v CIN Properties 1998 SC (HL) 90.    [Back]

Note 33   Our survey suggests that such provisions are rare in ground leases, although we encountered some 999-year leases in which the landlord must pay for the value of the buildings in the event of exercising a break option.    [Back]

Note 34   Scot Law Com DP No 112 paras 4.13–4.20.    [Back]

Note 35   Long Leases (Scotland) Act 1954 s 3.    [Back]

Note 36   Thus, in rejecting the idea that compensation should be available as an alternative to conversion, the Guthrie Report argued (para 69) that "where a lessee under an old ground lease of residential property fails to take advantage of the opportunity to obtain a feu title in accordance with our recommendations, we can see no reason why he should be given an alternative right to compensation".    [Back]

Note 37   Compare here the scheme for ultra-long leases, where, usually, no compensation is needed in respect of the vestigial interest of the landlord.     [Back]

Note 38   Scot Law Com DP No 112 paras 4.23–4.33.    [Back]

Note 39   Leasehold Reform Act 1967 s 15(2). It is estimated that a modern ground rent is around one third of market rent: see Commonhold and Leasehold Reform (Cm 4843, 2000) p 158.    [Back]

Note 40   Leasehold Reform, Housing and Urban Development Act 1993 ss 39(1), 56 and sched 13.    [Back]

Note 41   Housing (Scotland) Act 1988 ss 24 and 25.    [Back]

Note 42   Appendix C chart 16.    [Back]

Note 43   Guthrie Report para 66: "[W]e are satisfied that the usual practice of Scottish landowners, so far from showing an insistence on their legal rights, has been generous. There have, of course, been instances in which a lessee has been faced with a demand for a price which took into account almost the whole of the landowner's legal rights at the enhanced current value, but it seems clear that these cases have been exceptional, and at the end of our inquiry we find ourselves somewhat anxious lest the publicity which this matter is receiving should result in the abandonment by Scottish landowners of the reasonable spirit which has usually characterised their negotiations with lessees until now."    [Back]

Note 44   The phrase is from the response by the Faculty of Advocates.    [Back]

Note 45   Tenants' Rights Etc. (Scotland) Act 1980 ss 34–6; Housing (Scotland) Act 1988 ss 32–5.    [Back]

Note 46   Little further information has emerged since the end of the consultation period.     [Back]

Note 47   Paras 9.4, 9.5 and 9.19.    [Back]

Note 48   James v United Kingdom (1985) ECHR Series A no 98 para 19.    [Back]

Note 49   Robert Rennie, "Leasehold Casualties" 2001 SLT (News) 235, 239.    [Back]