Time to review the 20-year lease rule

Creative solutions needed to bypass leasing roadblocks, says Steve Dougherty

For over 30 years I’ ve advised clients on all matters pertaining to commercial real estate and observed significant change in Scotland’ s residential housing sector. Collectively, there are many reasons to be positive about

the current commercial and residential landscape. It includes the continued buoyancy of Scotland’s residential housing sector compared to other parts of the UK and the Scottish Government’s stated intent to alleviate the shor tfall in available housing; points to which I will return.

However, fundamental issues continue to gnaw at legal minds responsible for helping real estate clients to navigate the countr y’s legislative framework. There’s the long awaited overhaul of the planning system that is currently under review within the S cottish Parliament. Cer tain quarters too will take issue with the shortcomings of the LBT T regime that penalises those who wish to sell their higher value property and so arguably dents movement in that market segment. If in my opinion there’s a need to find solutions to these issues, it’s also time to seriously review the

perhaps out-dated 20-year lease rule. Where a lease is to run for more than 20 years, current legislation (introduced in 1974) prevents any part of the property that is subject to that lease from being used as a private dwelling house. The so-called 20-year lease rule was introduced when feu duties were being phased out. The ‘74 Act did what it was designed to do. Feu duties no longer exist and long leases (more than 175 years) can’t be granted and where existing are converted to a “heritable” interest.

In 2011 the law was relaxed slightly to allow residential leases for over 20 years for social housing. In 2015, the S cottish Government revisited the legislation, looking at the specific question of whether providers of purpose built student accommodation should be allowed to enter into residential leases for longer than 20 years. Due to other priorities, the pro

posal was not taken forward. Because leases of 20 years or less are not able to be registered in the property registers, Standard S ecurities (ie legal charges) can’t be granted and funding is impossible.

O f c o u r s e , I a c k n owl e d g e t h e r e are no easy answers to resolving the likes of the 20-year lease rule as one of many complex land and real estate issues mired in legislation. Yet, if we can’t readily abolish the 20-year lease rule, perhaps there’s an alternative approach that can be piloted on a limited basis in the open market. I’ll call it the ‘quasi free market approach’ based on a long leasehold arrangement for the buyer.

To explain my rationale for such an arrangement, let’s briefly revisit my initial point. Scotland’s housing market is booming. Just look at the significant developments in West and East Lothian for example as evidence that

there’s a huge appetite for the likes of young families to own their own home with space for their children to play. Planning gain factors now ensure that roads and railways are built, as well as schools and health centres. Communities are built, not just housing.

Yet as has b een widely rep or ted there are still many young p eople who don’t have the financial means to put down a deposit to get on the housing ladder. Here is where I envisage the long leasehold arrangement offering a means to access the housing sector for those who desire their own home but don’t fall into the category of social housing.

It’s a mo del that I b elieve would work in the Scottish market. Tenants can look forward to a long period of residence in what is truly ‘their home’ with the benefits of occupier upkeep and pride in the nature of their residence. I suspect this would also be an incentive for investors to get behind the scheme. Certainly, market demand will quickly determine if this alternative model, piloted in a few selected areas is worthy of further scrutiny and investment.

Let the market decide. It’s an i d e a b o r n e p a r t l y o u t o f f r u s - tration with the current inflexibil it y withi n S c otland’s planning and regulator y system. It also underlines my b elief that it’s time to identify creative solutions to bypass roadblocks like the 20-year lease rule.

Ste ve Dougherty is Partner and head of real estate for Shoosmiths in Scotland