Introduction
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. See Sharp v Thomson 1997 SC (HL) 66 and Burnett’s Trustee v Grainger 2004 SC (HL) 19. Accordingly, the so-called “race to the register” dictates that the first person to acquire a real right by way of registration prevails. See also Ceres School Board v McFarlane (1895)23 R 279.
There is, however, an attendant risk caused by the brief delay between delivery of the deed and its registration. This has come to be known as “gap risk”. That risk can be divided into (a) the risk that the granter is sequestrated, put into liquidation etc.; and (b) a risk that the granter grants a competing deed to another party and that deed is registered first. In addition, there is also a short gap between the date of the search in the registers on which the grantee relies and the actual date of settlement. This gap has been reduced considerably in recent years and, if using ARTL, (www.ros.gov.uk/artl) the gap is virtually removed altogether. Nevertheless, the gap still exists. As stated in para 14.2 of the Report of the Scottish Law Commission Number 222 on Land Registration (www.scotlawcom.gov.uk/publications/reports), “Efficient conveyancing can cut down these two gap elements but experience shows that it is hardly possible to eliminate the problem altogether.”
As mentioned above, the introduction of ARTL along with the effect of Section 17 of the Bankruptcy and Diligence (Scotland) Act 2007 have also helped reduce the gap risk but they do not provide a complete solution.
The gap risk has traditionally been covered by the seller’s solicitor granting a letter of obligation which, if in “classic” form constitutes a personal guarantee by the granter’s solicitor. In recent years, solicitors have, quite rightly, questioned why they should provide such a guarantee to make the conveyancing system operate more efficiently. As Professor Rennie has said, the letter of obligation is effectively the oil that lubricates the system and enables it to work.
In England and Wales, it is possible to obtain an “official search with priority” which provides a period of 30 business days (a period equal to 42 days). Under that system, the use of advance notices is optional but they are widely accepted as part of the conveyancing process as they afford a degree of protection to purchasers. A registered advance notice involves a notice being placed on the Register stating that the owner (A) is intending to grant a deed to a third party (B). This notice does not confer a real right on B. What it means is that if a deed is, in due course, granted to B and that deed is registered, then anything in the Land Register in favour of another party (C) that is registered between the date of the advance notice and the deed of the registration of the deed in favour of B is postponed to the said deed in favour of B – the advance notice being capable of being seen on a search of the Register carried out by a prospective purchaser.
Proposed Reform
A recommendation for reform to the Scottish system to deal with problems associated with floating charges was suggested a number of years ago. See Greens PLB Issue 45 at pp 1-3. In response to calls for reform of the system generally from The Law Society of Scotland amongst others, the Scottish Law Commission carried out an investigation into possible reform. This involved a consideration of the systems of advance notices used in England and Wales and in Germany. See Scottish Law Commission Discussion Paper 130 and the aforementioned Report on Land Registration.
A brief outline of the proposed reforms is as follows:
1. An advance notice may be registered whether or not there are antecedent missives.
2. It is recommended that the advance notice system will apply only to properties registered in the Land Register. Scottish Ministers will, however, have power to extend it to first registration.
3. The draft Bill which forms part of the Scottish Law Commission Report does not specify the form of an advance notice which, in practice, is likely to be electronic. It will be possible to lodge the notice in paper however. It is expected that the exact form of the notice will be regulated by rules to be promulgated by Scottish Ministers.
4. An advance notice would normally be granted by the party named as proprietor in the title sheet but third parties, who are not heritable proprietors but who can validly grant the deed in question, may also register an advance notice. It is also recommended that the notice can be granted by any other person, so long as the notice bears the consent of the person who could validly grant the deed in question. This accords with the German approach. In a standard conveyancing transaction, the missives will require to provide for an advance notice to be applied for.
5. Advance notices will enter the Application Record in the Land Register and would not be registered in the title sheet. Unlike at present, the Application Record will be one of the four recognised parts of the Land Register if the recommendations of the Scottish Law Commission are followed. See SLC Report paras 4.9 and 4.35.
6. The Scottish law Commission recommended that the advance notice would subsist for a period of 5 weeks (35 days) – not “business” days. The Bill envisages that the period can be varied by secondary legislation.
7. It is recommended that the protection afforded by advance notices should extend to entries in the Register of Inhibitions that appear within the protected period.
Conclusion
In broad terms, an advance notice would cover the risks covered by a typical letter of obligation. It is not envisaged that it would protect against a notice of potential liability for costs and other possible exceptions as may be listed by Scottish Ministers.
It is suggested that the introduction of advance notices in Scotland is long overdue. The Scottish Law Commission are to be congratulated for carrying out an in-depth investigation of the background to the current system and of the options available for reform as part of their research into the reform of the land registration system. Under the proposed system, there would still be a “race to the register”. Under that system the first person to register would prevail “but with the possibility of the result being changed if that registration happened during the currency of a notice in favour of another person” – SLC Report para 14.49.
Conveyancing practice would obviously require to change. The prospective grantee will require to ensure that the advance notice is entered on the Register a reasonable time before the intended settlement date. Then immediately prior to settlement, the Register can be checked to confirm the entry of the notice, to confirm that no competing deed has been registered (as now) and to confirm that no potentially competing advance notice has been entered.
The Scottish Law Commission envisage that the new system will be relatively straightforward to operate and that it will be of considerable benefit both to the legal profession and to members of the public alike. Assuming a clear search, the transaction can be settled and the deed in favour of the grantee registered without fear of challenge. In a normal conveyancing transaction, it is envisaged that there would potentially be two advance notices – one in respect of the Disposition and the other in respect of any Standard Security. This is seen as being a low cost solution to the potential harm caused by the gap risk – especially where the letter of obligation, for whatever reason, does not provide an assurance.
It will be interesting to see whether or not letters of obligation will become redundant. It is hoped that they are no longer required. They have served their purpose and should be laid to rest – or as could otherwise be said: “Their time has came and went”!
An Article by Professor Stewart Brymer WS, Brymer Legal Limited.
Published in Greens PLB (August 2011)
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