CHANGES TO LANDLORD'S HYPOTHEC

Landlord's hypothec is a common law right of security enjoyed by landlords over moveable goods situated on leased premises. Previously,

• it covered all goods on the premises regardless of who owned them (subject to certain exceptions),
• it secured the current year's rent (and not prior arrears or other sums due), and
• it was enforced by Court proceedings known as sequestration for rent. 

It was a powerful tool, although generally not often used in practice.

The Reforms

From 1 April 2008 Section 208 of the Bankruptcy & Diligence etc (Scotland) Act 2007 ("the Act") has abolished sequestration for rent, retaining the landlord's hypothec in an amended form.  These reforms significantly restrict the items caught by the hypothec.  In particular,

• the hypothec will not cover property owned by a person other than the tenant, and
• any property acquired by a third party from the tenant in good faith will cease to be subject of the hypothec when it is acquired by that person.
• the hypothec will not arise in relation to any property kept in a dwellinghouse, on agricultural land or on a croft.  (Previously, certain exemptions existed which were related primarily to dwelling houses).

However, on a positive note from the landlord's perspective, the reforms significantly extend the amount of rent which is secured by the hypothec to cover all unpaid rent, not just rent due in the current year (subject to prescription). 

Notwithstanding the abolition of sequestration for rent, landlord's hypothec is to continue as a right in security that will rank in an insolvency situation.  Therefore, the only point at which the security may be enforced will be when the tenant becomes formally insolvent.

Comment

Given that the effect of insolvency on landlord's hypothec was previously unclear, the Act has provided some clarity.  In addition, third party owners of goods on the premises who, on a practical level, may well have been unaware of the existence of landlord's hypothec, will no longer face the prospect of their goods being sold.  On a practical level, it might appear little will change given that actions for sequestration of rent were not particularly common.  However, in the current climate, where landlords are keen to explore all options open to them, the restriction may be noticed.

If you require further information, contact Heidi Archibald on 0131 777 7123 or Fiona MacGregor on 0141 567 9280.