Michael Upton: Opting for reality

Michael Upton: Opting for reality

Michael Upton

Michael Upton, FCIArb, advocate, mediator & arbitrator, discusses an aspect of the Scottish Law Commission’s Discussion Paper No. 175, on Heritable Securities: Non-monetary securities and sub-securities, to which the commission is now seeking responses.

As you may know, in the context of heritable conveyancing, an option is a contract obliging a land-owner to sell at the option of the purchaser – typically a developer. The option may also be to take a lease. An option is normally for a given period of time (or subject to a resolutive condition). Usually the contract also obliges the land-owner not to grant an adverse right during that period of time (or for so long as the resolutive condition is not purified).

Since an option is a contract, it gives the holder only a personal right; chiefly, to a grant by the land-owner. It is not a real right which affects third parties. So if A has an option over B’s land, and B dishonours the contract by selling to C, the option gives A recourse against neither C nor the land, but only against B – typically a right to damages for any recoverable loss. Given that A wanted the land, he may consider a possible right to damages to be beside the point.

In England, A can register his option on the Land Register, so that it prevails over any later, inconsistent grant to C: Land Registration Act 2002, sections 40 to 47. If English law spoke of real rights, it might call a registered option a real right. In Scotland an option cannot as such be registered so as to give the holder a real right. That is because there is no statutory provision which says that it can be, where nothing can be registered in the Sasines or the Land Register without statutory authority.

The prudent holder of an option therefore requires the land-owner to grant in his favour a standard security, which when registered confers a real right of security in respect of his personal rights under the option agreement.

Last month the Scottish Law Commission published the third in a sequence of Discussion Papers about real security – No. 175, on Heritable Securities: Non-monetary securities and sub-securities. The commission discusses the use of standard securities to protect options.

That use is not entirely straightforward. A standard security can secure an obligation to do something – say, convey title to land – because that is an obligation ad factum praestandum, which (along with the commoner case of a debt) is an obligation which a standard security can secure: Conveyancing and Feudal Reform (Scotland) Act, section 9(8)(c). But A’s practical remedies under the 1970 Act are pecuniary remedies - typically, to recover a sum of money from a sale of security subjects - whereas his primary rights under the option agreement are not pecuniary rights.

It follows that, under the Act, enforcement of the security quoad the right to a conveyance is only possible in respect of a secondary right to damages – either (a) at common law, or (b) in terms of an express contractual right to a substitutionary payment. But (a) depends on proof of loss and (b) may not have been agreed (or might be an unenforceable penalty). And that assumes the arrival of a point in time when the option is exercisable, or at least proof of loss of a chance that it would have been. Until then, A’s chief right is simply that no adverse grant should be made by B. That is a negative obligation. While an obligation ad factum praestandum can be secured under the 1970 Act, the Act says nothing about securing negative obligations, so they cannot be. That was considered in 2019, in the first of the commission’s three Discussion Papers, No. 168 on Heritable Securities: Pre-default (paras. 4.15 & 4.67).

The commission points out that this by no means renders A’s registered standard security pointless. It still gives forms of prospective and retrospective protection against adverse grants.

At best, it may allow A to say that C took his grant in bad faith, because the registration of the security put him on notice about A’s prior right, so as to give A a remedy against C under the rule against ‘offside goals’.

At worst, the registered security can be a ‘clog on the title’, which will ordinarily deter C from accepting an adverse grant. It is true that, in principle, if B maintains that the option is not exercisable, or that breach would give A no claim for damages, then he has the remedy of asking the court to declare that the security is spent, under section 18(2)(b) of the 1970 Act, but that is an uninviting road rarely taken. Instead, for practical purposes the public existence of the security can give A what the commission usefully calls ‘a seat at the table’.

Nonetheless, the commission observes, this is an awkward if effective use of the 1970 Act to convert personal rights into real rights. It strains against the principle that contracts cannot create new kinds of real right; the recognised real rights are defined by law. Against that, options and their protection are held to be commercially useful, so denying them ‘reality’ is - well, not really an option.

At the same time, current practice at least in theory depends on remedies which may be unsatisfactory. One is the 1970 Act’s remedies, in which A probably has no practical interest. The other is the ‘offside goals’ rule, whose justification and scope are both so uncertain as to have prompted the commission to suggest that it might better be abolished (Discussion Paper No. 168 at para. 8.20; see now Discussion Paper No. 175 at paras. 4.17-4.18 & 4.71; and for instance Advice Centre for Mortgages v McNicoll, 2006 SLT 591, and Gibson v Royal Bank of Scotland, [2009] CSOH 14).

Broadly for these reasons, the commission proposes that statute should instead create a new form of protection for options.

The Discussion Paper reviews various possibilities for adapting existing categories of heritable right so that they might be used to protect rights to conveyance of land: namely, standard securities; real burdens; floating charges (so as to allow individuals to grant personal charges over heritage); and inhibition. The commission suggests reasons for rejecting all of them.

Instead, the commission’s favoured reform is legislation to allow a land-owner to execute a new form of advance notice, comparable to that introduced by section 59 of the Land Registration etc. (Scotland) Act 2012 (in place of the former practice of agents granting letters of obligation) with which all conveyancers are familiar. As part of an option agreement, B would apply for registration of a notice summarising what had been agreed. The central effect would be to give priority to any grant which may come to be made in implement of the option, over an adverse deed granted after registration of the notice.

Responses to that proposal are sought, as they are to the consequent questions. What should such a notice be called? What should it say? Should it protect only A, as opposed to third parties contracting with him? Should the notice be entered on the title sheet, and if so in which section? What should be done where it relates to a Sasine title? Should it have effect for only a given period of time, and if so for how long? Should it be possible to extend that period? What voluntary and involuntary adverse grants or deeds should a notice affect? Should the benefit of the notice be assignable or carried by assignation of the option? What conditions should be necessary or sufficient for a notice to be discharged? Where a tenant has an option to purchase in terms of his lease, should he be entitled to have such a notice registered, or could that act as an unfortunate brake on sales of landlords’ interests?

Responses are sought by 29 September. The state employs the skilled men and women of the commission to recommend how our laws might be made better. The unstated, underlying assumption is that our legislature may consider that their recommended reforms of private law in general, or commercial property law in particular, merit its attention.

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