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The Scottish Law Commission in para. 3.9 of their Report on Land Registration (No. 222 of 2010) noted that with the introduction of ‘Advance Notices’: “As well as appealing to conveyancers, the system should benefit their clients...”

The Scottish Law Commission in para 3.9 of their Report on Land Registration (No. 222 of 2010) noted that with the introduction of 'Advance Notices': "As well as appealing to conveyancers, the system should benefit their clients..."

In this article, Evan Crainie critically examines these comments against the former practice of granting letters of obligation, the case law in Burnett's Trustee v Grainger and Sharp v Thomson, and in light of the Land Registration etc. (Scotland) Act 2012.

 

‘Delivery of a disposition in exchange for payment of the price in a conveyancing transaction does not, of itself, confer a real right. Only registration does that.’[1]

 Land Registration in Scotland has been burdened with, ‘…the brief delay between delivery of the deed and its registration.’[2] This delay is known as the ‘gap risk’ and there have been numerous attempts to ‘plug’ this gap. One such attempt was the system of letters of obligation, ‘…the solicitor guarantees that during that gap period, nothing will be done which would prejudice the transaction to hand.’[3] Such letters, however, have been the subject of much criticism from solicitors, questioning why they should put themselves at risk personally, ‘To many it seems unreasonable that they should incur personal liability in this way...’[4] In response to this criticism the Land Registration (Scotland) Act 2012[5] has introduced the advance notice system[6], ‘…to cover the “gap risk”…’[7]

The advance notice system has been lauded for not only, ‘…appealing to conveyancers…’ but also for benefiting their clients.[8] This essay will critically consider these comments against the former practice of granting letters of obligation, the case law in Sharp v Thomson[9] and Burnett’s Trustee v Grainger,[10] and in light of the LRA 2012.[11]

The criticisms of letters of obligation have already been mentioned above with solicitors stating, ‘Nobody likes letters of obligation.’[12] Clearly then, at no point have letters of obligation ‘appealed’ to conveyancers, ‘…it appears that Scottish solicitors, as well as insurers, have not been satisfied with the system.’[13] However, it could be argued that the letters benefited the solicitor’s clients in some way, by protecting them from liability, ‘…the solicitors obligation has nothing to do with the client.’[14]Although this was the case, the client still paid for the solicitors guarantee through conveyancing fees, ‘Providing letters of obligation inevitably has an impact on transaction costs, with clients ultimately picking up the tab for steadily increasing insurance premiums.’[15]Examining this statement, the client was therefore paying for the former system to operate.

 As was stated earlier, in response to the criticism the advance notice system[16] was introduced.  This system largely covers the same risks covered by a letter of obligation[17] but moves toward a more straightforward conveyance which will be welcomed by solicitors[18] and clients[19] alike, ‘All lenders and those involved in security transactions will doubtless welcome the introduction of these notices.’[20] Advance notices will safeguard against the registration of another conflicting deed and the bankruptcy of the seller[21] for up to thirty-five days[22] from the date of their lodging.

Considering the above arguments it is clear that advance notices were needed, ‘…for the modernisation of Scotland’s land registration system.’[23]Before their introduction, Scotland was the only country that used the system of letters of obligation.[24] Advance notices will therefore, both appeal to the conveyancer and benefit the client as the system is now more modern and in line with the rest of Europe.[25]

Another occurrence associated with Scots Property Law is the ‘race to the registers.’ Lord Rodger sums this phenomenon[26] up in the Burnett’s Trustee[27] case,

‘...the competition between the trustee and the uninfeft purchaser or creditor with an unrecorded heritable security is a struggle… to obtain the real right by recording the relevant deed and infefting himself first.’[28]

The case law in Sharp[29] and Burnett’s Trustee[30] was pivotal in verifying the race to the registers. In Sharp[31], due to a mistake, a disposition was not recorded after settlement. Receivers were appointed to the selling company and a floating charge granted over its property crystallised. The Court of Session held that delivery of the disposition did not grant any property right, and the receiver’s fixed security received priority over the purchasers and their lenders. The case was appealed to the House of Lords and the decision reversed. Lord Jauncey stated that although ownership hinges on registration, some sort of beneficial interest in the property passes on delivery and this was enough to overcome the receiver.[32]

            The decision in Sharp was subject to much criticism, ‘Few cases in Scottish legal history have generated so much academic debate…’[33] with many seeing Scots law as having, ‘…suffered a grievous injury at the hands of the House of Lords.’[34] The judgement lead to two main concerns.[35] The first being that the insolvency of a seller can lead to the buyer losing the property and price. Although Sharp[36] did remove this problem in one situation[37] it lead to questions such as, ‘Will we have to litigate to resolve the same issue in relation to liquidation and administration?’[38]

            The second concern was that the judgment may destabilise Scots property law, ‘…Lord Jauncey's views…would destabilise the distinction between real and personal rights and thereby do serious damage to our law of property.[39]Taking these concerns into consideration it is clear that an advance notice would have benefited both the conveyancer and their client in the Sharp[40] case. Had such a system been around at the time, the Thomsons would have had thirty-five days to register the disposition.[41] As their disposition was registered eleven days after settlement, they would have successfully registered the disposition timeously and became owners of the property. Therefore the advance notice system benefits both conveyancer and client as the whole problem in Sharp[42] would have been avoided completely.

            It is important to note, that the decision in Sharp,[43] ‘…should be regarded as a special decision relating only to…floating charges…’[44] This quote from Burnett’s Trustee[45]was extremely important as it distinguished the rule in Sharp. In restricting the rule in Sharp[46] to floating charges, Burnett’s Trustee,[47]therefore confirmed that the ‘race to the registers’ is still operative in other areas of Scots Property Law. This confirmation was important as there was some uncertainty[48] in relation to the scope of Sharp.[49]

            The cases of Sharp[50] and Burnett’s Trustee[51] saw the introduction[52] of section 17 of the Bankruptcy & Diligence etc. (Scotland) Act 2007.[53] It states that a trustee in sequestration is prevented from registering title to heritable property of the seller for 28 days after the award of sequestration is registered. This allows the buyer, who has bought in good faith, to conclude title by registration. Clearly then both cases, in introducing section 17, have went some way in benefiting the conveyancer and client by granting them a period of protection.[54]

            One final point to mention, in light of the LRA 2012,[55] is in relation to inhibitions. With the introduction of the advance notice system, if an advance notice is granted, and the seller is inhibited after this, the inhibition will have no effect, ‘…the buyer would have nothing to fear from adverse entries in that period, either in the Land Register or in the Register of Inhibitions.’[56]Clearly this is a beneficial point for both conveyancer and client as, once again, they are granted a period of protection.

            In conclusion, this essay has critically considered the beneficial aspects of advance notices for both conveyancer and client against the former practice of granting letters of obligation, the case law in Sharp[57] and Burnett’s Trustee,[58] and in the light of the LRA 2012.[59] Clearly, advance notices are more appealing to the conveyancer and beneficial to the client than letters of obligation as they are straightforward, cheaper, remove solicitor’s liability and also provide a period of protection. In relation to the case law of the two cases, these were both influential in benefitting client and conveyancer in influencing section 17 of the BAD 2007[60]. Finally, in light of the LRA 2012,[61] advance notices have again had a beneficial impact as they render inhibitions meaningless, during the protected period, once they have been granted.

 

[1] Stewart Brymer, ‘The demise of the letter of obligation?’ (2011) 113 Prop LB 1

[2] Stewart Brymer & Robert Rennie, ‘A bold step forward.’ (2012) 57(3) JLSS 32

[3] Committee Conveyancing, ‘Clarifying the classic letter of obligation.’ (2003) 48(4) JLSS 26

[4] Scottish Law Commission, Land Registration (Scot Law Com No 222, 2010) Para 14.4

[5] LRA 2012

[6] Between sections 56 and 64

[7] Brian Dempsey, ‘Land Registration etc. (Scotland) Act 2012 (asp.5)’ (2013) 430 SCOLAG 166, 168

[8] Scottish Law Commission (n 4) Para 3.9

[9] 1997 SC (HL) 66

[10] 2004 SC (HL) 19

[11] LRA 2012

[12] George Gretton, ‘The shape of things to come.’ (2010) 55(3) JLSS 22

[13] Korrasut Khopuangklang, ‘Unilateral Promise: Some Practical Advantages.’ (2013) 2 Edinburgh Student L Rev 42, 50

[14] Khopuangklang (n 11) 50

[15] Brodies LLP, ‘The Land Registration etc. (Scotland) Bill’ <http://www.brodies.com/sites/default/files/pages/land%20registration%20bill.pdf> accessed 13th November 2013 

[16] LRA 2012 (n 11) ss56-64

[17] Brymer & Rennie (n 2)

[18] There will no longer be the issue of personal liability for them.

[19] The cost of conveyancing may now reduce as the client will no longer have to fund the solicitor’s insurance premium via conveyancing fees.

[20] Iain Doran, ‘Legislative Polyfilla’ (2011) The Estates Gazette 65

[21] Explanatory Notes to the LRA 2012 para 154

[22] LRA 2012 (n 11) ss58(1)

[23] Brodies LLP (n 13)

[24] Scottish Law Commission (n 4) Para 14.4

[25] Scottish Law Commission (n 4) Para 1.5

[26] In the context of a trustee in sequestration.

[27] Burnett’s Trustee (n 10)

[28] Burnett’s Trustee (n 10) [141] (Lord Rodger)

[29] Sharp (n 9)

[30] Burnett’s Trustee (n 10)

[31] Sharp (n 9)

[32] Sharp (n 9) pg 77 (Lord Jauncey)

[33] Scottish law Commission, Sharp v Thomson (Scot Law Com No 208) Para 1.9

[34] Robert Rennie, ‘The race to the registers revisited.’ (2005) 50(7) JLSS 53

[35] Scottish law Commission (n 33) Para 1.10-1.11

[36] Sharp (n 9)

[37] Receivership

[38] Alistair Burrow, ‘The race is on (again)’ (2004) 49(10) JLSS 46

[39] Kenneth G C Reid, ‘Equity Triumphant.’ (1997) 1(4) Edin LR 464, 467

[40] Sharp (n 9)

[41] LRA 2012 (n 11) ss58(1)

[42] Sharp (n 9)

[43] Sharp (n 9)

[44] Burnett’s Trustee v Grainger 2002 SC 580, [25] (Lord Coulsfield)

[45] Burnett’s Trustee (n 44)

[46] Sharp (n 9)

[47] Burnett’s Trustee (n 44)

[48] As mentioned above at, Burrow (n 38)

[49] Sharp (n 9)

[50] Sharp (n 9)

[51] Burnett’s Trustee (n 44)

[52] Explanatory Notes to the Bankruptcy & Diligence etc. (Scotland) Act 2007, para 65

[53] BAD 2007

[54] Much like what an advance notice will do.

[55] LRA 2012 (n 11)

[56] Gretton (n 12)

[57] Sharp (n 9)

[58] Burnett’s Trustee (n 10)

[59] LRA 2012 (n 11)

[60] BAD 2007 (n 53)

[61] LRA 2012 (n 11)

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