17 January 05
The Tenements (Scotland) Act provisions introducing the notice of potential liability for costs, raise a number of questions as to how they will work in practice
The Tenements (Scotland) Act 2004 is a commendable piece of legislation. It addresses some awkward anomalies in the law of the tenement. The tenement management scheme which the Act introduces should greatly reduce problems of maintenance and management where there is no proper provision by way of deed of conditions. This article (which purports to be practical rather than learned or academically rigorous) addresses issues arising from section 12(3) of the Act, which was introduced at a very late stage in the bill’s progress through the Scottish Parliament. Section 12(3) creates a new registerable event and document known as a notice of potential liability for costs. This relates, as the name implies, to the issue of whether and to what extent a flat purchaser in a tenement should be liable for common charges incurred or proposed prior to his purchase.
Legal and contractual background
In the context of a sale of a flat we might identify four types of actual or potential common charge for maintenance or repair works in a tenement:
A. Works in contemplation or recommended but not yet decided upon or scheduled as at the date of entry.
B. Works decided upon and instructed but not yet carried out by the date of entry.
C. Works carried out and completed by the date of entry but not yet paid for.
D. Works carried out and completed and fully paid for by the date of entry.
Liability for the relevant share of the costs of works of type A would not arise at all until, at the earliest, the work was instructed, and thus became type B. At the missives stage of the purchase the purchaser’s solicitor might seek to exclude liability for type A, but more often than not the solicitor for the seller would successfully reject such an attempt and the purchaser would be left to meet the due cost of the works if and when they actually came to be instructed.
Liability for the cost of works of type B would arise at the time the works were instructed, but this liability would be contingent upon actual execution and completion of the works. As between a seller and a purchaser the question of which of them should actually meet the cost would be a matter for negotiation at missives, and in my experience it would commonly be provided that the seller remained liable for these even if not carried out or completed by the entry date. If the missives were silent and the underlying law were to apply, my understanding of this is that liability to meet the cost would (or at least could) transmit with ownership and the purchaser would become liable.
Type C is clearly a special case of type B. Here the works have been carried out and an actual liability to pay (as distinct from the more contingent liability of type B) has already arisen and is enforceable against the seller before the flat has been sold. Here again the parties would normally provide for this in missives with the express stipulation that such liability remains exclusively with the seller. Furthermore this contractual provision is by general consensus underscored by the underlying common law, the point being clarified and settled by the well known case David Watson Property Management v Woolwich Equitable Building Society 1992 SC(HL) 21.
The type D case causes no difficulties since essentially, so far as any change of ownership is concerned, it is already past history.
Section 12(3) of the 2004 Act
Section 12(3) concerns itself with type C cases. It is an exception carved out of the generality of section 12(2), which provides that where a person becomes a new owner that person will be severally liable with any former owner for any relevant costs. Section 12(3) then provides that a new owner shall be liable for relevant costs relating to any maintenance or work carried out before the acquisition date (i.e. type C) only if a notice of potential liability for costs was registered in relation to the flat at least 14 days before the acquisition date. Please note I am truncating and paraphrasing the actual terms of the subsection here and I would direct any interested reader to the full text of the Act.
The reason, as I understand it, that section 12(3) and related provisions came into the Act was because of the consternation caused by the generality of section 12(2). As initially brought before the parliament, clause 12(2) stood on its own. This accordingly was amending the law as previously understood following the Woolwich case. A strong lobby, led by the Scottish Law Agents Society, pointed out to the Parliament that by reversing this settled and well understood state of affairs it was potentially condemning the purchaser of a flat to pick up the long-running common charge debts of his predecessor without, necessarily, having any notice of these or any certain way of finding out what these might be. Section 12(3) was therefore introduced to provide that certainty back to the purchaser, by confining his several liability to those costs of work which had been carried out prior to the acquisition date of which notice had been placed on the Land Register for the flat at least 14 days prior to the acquisition date.
The lobbyists were pleased with this outcome. It might be noted here that the reason for their pleasure was their underlying policy of affording greater security and contractual certainty, in line with pre-existing law, to a purchaser. By contrast the policy which underlay the original inclusion of clause 12(2) on its own was presumably that of good management of the tenement, since it is always going to be easier to collect outstanding common charges from the proprietor actually in ownership and possession, than from some long departed and possibly insolvent previous owner. It might also be noted that clause 12(2) as originally proposed tracked very closely the text of section 10(2) of the Title Conditions (Scotland) Act 2003, dealing with liability between new and former owners of a property (of any type, not necessarily or commonly a flat in a tenement) for any relevant obligation arising in connection with compliance with a real burden. The result of the introduction in the 2004 Act of section 12(3) was a substantial consequential amendment of section 10 of the 2003 Act so that the parallelism between the two Acts could be maintained in these respects.
Main features of the notice
There are a number of interesting features of this new type of notice provided under the later subsections of sections 12 and 13 of and schedule 2 to the 2004 Act. I propose to take these now in turn and comment upon them.
1. Form of notice
This is provided by schedule 2. As originally drafted this was innocuous enough. It provides that the notice give details of certain maintenance or work carried out in relation to the flat specified in the notice, and that the effect of the notice is that a person may on becoming the owner of the flat be liable by virtue of section 12(3) for any outstanding costs relating to the maintenance or work. It then prescribes certain factual detail to be included, such as the flat in question, a description of the maintenance or work, the person giving the notice, a signature and a date. So far so good, but on 6 December 2004 the Scottish Ministers, in pursuance of power granted to them under section 13(6) of the Act, altered the form of notice so that it would refer to work carried out or “to be carried out” (my underlining) in relation to the flat specified. This puzzled and concerned me. When the proposed adjustments to bring in section 12(3) were first published I had initially not properly read or understood the provision and had leapt to the conclusion that the notice procedure would be available for any proposed or contemplated piece of maintenance work, however fanciful or unlikely ultimately to be instructed. I had visions of tenement title sheets groaning under mountains of unrealistic, or even maliciously conceived notices for common works which no sensible manager or managing committee would ever promulgate. Then I looked more closely at section 12(3) and realised that the notice would have to relate to work which had been “carried out” (i.e. type C as mentioned above) and this took a lot of the heat out of my concern, though not all of it. It looked to me, when I learned of the proposed amendment to the notice by the Scottish Ministers, as though the door was being re-opened to the very abuses I initially feared.
I took this point up with Professor Kenneth Reid, whom I learned was the author of the amendment in question. He argued back to me, with some cogency I would have to admit, that the amendment has the benefit of enabling a party concerned about non-recovery to get a notice on the Register at an earlier stage rather than having to wait until after actual completion of the work when there might be more difficulty getting the notice on in time to “catch” a proposed sale of the flat. The professor agreed with me that the Scottish Ministers did not have power to alter the underlying terms of section 12(3) and he explained that if, come the acquisition date, the work in question had not been “carried out” then it would not be a type C situation but type A or B and thus caught within the generality of section 12(2), and no different, so far as the underlying law was concerned, from what had previously been the case. I saw the logic of this but pointed out that the facility afforded by the phrase “to be carried out” opened up again the possibility of fanciful or malicious placing of notices which had given me my initial concern. The professor’s response was that while that may be true, he thought it unlikely in practice that such abuses would occur. I begged to differ but unsurprisingly Professor Reid’s recommendation prevailed and the ministers duly promulgated the amending statutory instrument.
I remain concerned for at least three reasons:
Section 28(3) of the Act provides that “owner” includes a heritable creditor in possession. This adds neon light prominence to the reversal of the Woolwich case and should be causing concern within the mortgage industry.
The force of “to be carried out” creates a kind of floating charge. The notice requires the work to be described only “in general terms”. This means that whatever actual work may be carried out, whether major or minor, is caught by the notice, whether actually in contemplation at the time of the notice or not. The notice sucks up future works and costs into its maw like a malignant hoover. Hardly the stuff of certainty.
As someone described it to me, the notice is a “debt trap”, particularly in situations of poor payment history. Far from improving prospects of recovery, the notice is likely to put off the potential purchaser altogether, leaving the debt outstanding with no prospect of better performance from a new proprietor.
2. The acquisition date
This is defined by the Act to be the date on which the new owner acquired right to the flat. The Act does not say “real right” and so in my view this has to mean the date of conclusion of missives. In turn this means that if a notice of potential liability for costs is to be effective it requires to be registered at least 14 days before the date of conclusion of missives for a sale. The alternative view would be date of delivery of the disposition or date of registration.
3. Who may register?
Section 13(1) provides that such a notice may be registered in relation to a flat only on the application of the owner of the flat, the owner of any other flat in the same tenement or any manager within the meaning of the tenement management scheme (for example a factor in the traditional Glasgow sense).
It is hard, though probably not impossible, to envisage circumstances where the owner of a flat would want to register such a notice against his own property. Clearly the motivation to register a notice will lie most frequently with other proprietors in the tenement or with the tenement factor. It is hard to say at this stage whether the use of such notices will become common or even standard practice. One can see a tenement factor taking the view that a notice should be registered against every flat the moment a scheme of work of any significance is scheduled. The cost will be of the order of £30 and I understand the Keeper will not insist upon production of the land certificate. Where there is no factor the same policy might be adopted by a co-proprietor who is co-ordinating a scheme of works, although such a person is likely to be less sophisticated in his understanding of the process involved and its actual relative simplicity to carry out. The main problem might be ascertaining the various title numbers but I expect that factors at any rate might develop a routine of keeping title numbers on their databases.
4. Registration: no checks
The completed notice is to be sent to the Keeper along with a Form 2. The Keeper will record the notice in the burdens section of the title sheet. An important provision is section 13(5) which provides that the Keeper shall not be required to investigate or determine whether the information contained in any notice is accurate. On its own this provision is obviously sensible since the Keeper cannot be expected to undertake a verifying exercise in relation to every notice of this kind presented for registration. That does, however, leave the door open for inaccurate, incorrect or even plainly false notices to get on to the Land Register with consequential blighting effect upon the title concerned.
It is in this area that my personal fears are strongest. In my experience common charges are a frequent source of dispute among co-proprietors, particularly where no common factor or manager is involved. An individual proprietor faced with a substantial cost of repair in his flat will often look around to see if there is any way in which he can argue that the work itself or the root cause of the work is in fact common and thus should be shared among the other proprietors. For example a top floor proprietor suffering water penetration through his ceiling may well claim that the source arose in the common attic space and that the damage to his flat is consequential upon that, rather than a matter for his personal pocket. My concern is that regardless of how sound or how spurious such a claim may be, there is nothing the other co-proprietors can do to stop that individual demanding a share of the costs and, if he is determined enough, registering a notice of potential liability for costs against each of their titles. This may not make a lot of difference so long as none of the co-proprietors is seeking to sell, but the moment one does, the notice will come to light and solicitors for a purchaser will demand that the issue be resolved before the purchase proceeds. This may well result in the proprietor feeling constrained to make a payment to the notice placer regardless of the merits of the claim itself.
Practitioners to whom I have spoken about this vary in the extent to which they share this fear. Many of them think I am being too pessimistic. Time will tell.
More generally I am not persuaded that the majesty of the Land Register should actually be used for an issue like this, which in many respects is more one of personal obligations rather than real.
5. Expiry and discharge
Section 13(3) provides that a notice of potential liability for costs will have a life of three years, that is to say it will expire at the end of the period of three years beginning with the date of its registration. There is, however, provision for renewal before the end of the three year period. There is no provision at all in the Act for discharge of a notice such that once on the Register it can be removed from it. On the face of it this seems astonishing, but on closer thought it is difficult to see how providing for a proper means of discharge could easily be achieved. In many cases a registered notice will be placed by one individual or a factor for the benefit of all the co-proprietors and not simply the notice placer himself. If the original notice placer were to be permitted unilaterally to discharge it, that could be to the prejudice of the other parties sharing the benefit of the notice. It was theoretically possible to provide that all parties actually or potentially benefited by the notice could discharge it collectively, but as well as being a cumbersome exercise the question would arise as to whether, in a given case, all interested parties had properly entered into the discharge, whether there was a match of signatories with their individual titles and so on. It looks to me as though the Parliament, realising these difficulties, decided not to attempt any discharge procedure but simply to leave notices to wither on the vine after the three year period had elapsed. I have spoken with the Registers regarding this point and understand that the Keeper is unlikely to entertain any purported discharge of a notice because of the absence of provision for it within the Act.
6. Prescription and renewal
Section 15 provides that the five year prescription under section 6 of the Prescription and Limitation (Scotland) Act 1973 will apply to any obligation to pay a sum of money by way of costs to which section 12 of the Tenements Act applies. This clears up the question which previously was in doubt as to whether or not such an obligation might subsist for 20 years until application of the long negative prescription. Where however the obligation is the subject of a notice of potential liability for costs then I would assume that so long as that notice keeps getting renewed so as to provide a further three year period, the five year prescription will not apply.
So far as a purchaser is concerned the most cautious course will be to include a provision in the title clause of his offer to the effect that the land certificate exhibited:
“will disclose no entry deed or diligence (including without limitation any notice of liability for potential costs registered under the Tenements (Scotland) Act 2004 or the Title Conditions (Scotland) Act 2003) prejudicial to…”.
There is undoubtedly a strong argument that such an insertion is not necessary since the general wording of the clause already provides sufficient protection. That may be true, but on the other hand the insertion is not particularly lengthy and the fact that the Keeper is placing the notice in the burdens section rather than the charges section if anything adds strength to the view that the insertion should be made.
A seller, however, has a problem if in fact a notice is registered against his title. What is he to do? In many cases there will be no difficulty because the work in question will have been clearly described and the work carried out to verifiable observation. Alternatively where a factor is involved, a letter confirming completion and payment of the works from that factor may well suffice. The seller, however, does not have it in his power to remove the actual notice from his title and he therefore has to adjust the missives accordingly. My suggestion in this regard, which I am not offering with any magisterial authority but merely for discussion, is along the following lines:
“in the event of any notice of liability for potential costs under the Tenements (Scotland) Act 2004 or the Title Conditions (Scotland) Act 2003 having been registered prior to 14 days before the date of conclusion of missives to follow hereon the purchaser shall be deemed satisfied in relation thereto if one of the following applies:
(a) on or prior to the entry date the seller produces a receipt from the party or parties placing or benefiting from placement of the notice that the whole costs to which the notice relates have been paid;
(b) on or prior to the entry date the seller produces written confirmation from the party or parties placing or benefiting from placement of the notice that notwithstanding the notice they will look only to the seller for the payment of the costs to which the notice relates and not the purchaser;
(c) on or prior to the entry date the seller lodges the sum of £[ ] with ourselves under irrevocable instructions that once the precise sum due by the seller relative to the subject matter of the notice has been admitted by or constituted against the seller the deposited amount with any interest accrued thereon shall be applied by us to make payment of such precise sum in return for written confirmation from the party or parties placing or benefiting from placement of the notice that the whole costs to which the notice relates have been paid; or
(d) where the notice was registered prior to the carrying out of the works in question, these works have not actually been carried out prior to the date of conclusion of missives to follow hereon.”
Clearly there will be considerable room for adjustment, negotiation and argument in relation to all of the foregoing, perhaps particularly (d). It is too early to say with any certainty how things will settle down in practice. There is no doubt, however, that yet another potential pitfall has been introduced into the conveyancing process for which practising conveyancers will need to provide. They will be glad to do this, however, because conveyancing is really so easy, and it is an embarrassment to charge fees at all.
Donald Reid is a partner in Mitchells Roberton, Glasgow