Landlord’s Hypothec – securing rent arrears in Scotland

In Scotland, landlords benefit from a legal right in which rent arrears due to them is subject to a security in their favour over the moveable property of the tenant within the leased property.

The right is automatic in the sense that the landlord does not need to take any positive step to activate the right (i.e. the right need not be referred to in the lease; there is no court process or other ‘hoops to jump through’). However, the security operates only in the event of an insolvency event resulting in the tenant going into administration, liquidation or sequestration (as the case may be). The security only extends to unpaid rent falling due within a period of 12 months prior to the insolvency event. Items which are not wholly owned by the tenant (i.e. items owned jointly with a third party; leased items; items subject to hire purchase; or items otherwise subject to a retention of title clause; etc.) are not covered by the security.

Moveable property within the leased premises, such as, furniture, stock, tools, IT equipment, etc. will be caught by the security (if they are owned outright by the tenant exclusively). The security ranks as a ‘fixed security’ taking precedence over other securities, including, a floating charge.

How landlords can exercise the right

Landlords who wish to exercise their right to hypothec, on a practical level, need only notify the appointed insolvency practitioner (“IP”) that rent arrears is due and that they are exercising their right in security over the relevant moveable property of the tenant. The IP should accordingly be put on notice that the said property ought not to be removed or disposed of without the landlord’s consent.

Once the IP knows that hypothec is engaged, in order to dispose of the relevant moveable property, the IP will require the landlord to discharge the security. This presents an opportunity for commercial terms to be agreed.

Summary

To summarise, the key points are as follows:

1. Hypothec is available in relation to Scottish leased premises only;
2. Only rent arrears falling due within 12 months of insolvency is secured (i.e. not other liabilities arising under the lease, such as in relation to dilapidations, insurance, etc.);
3. The security is over moveable property only (i.e. items not fixed to the ground, such as, furniture, tools, stock, IT equipment, etc.);
4. Only moveable property within the leased property is included;
5. The security ranks ahead of other securities, including, a floating charge;
6. The security arises upon the tenant going into liquidation/ administration/ sequestration;
7. The right is automatic – the landlord need not do anything to ‘activate’ the right;
8. In practical terms, landlords should notify insolvency practitioners if they intend to exercise the right.

If you require advice in connection with any of the topics raised in this article, please contact our property litigation team.