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21 February 2014
These are interesting times in Scotland. The recent parliamentary elections brought the people of Scotland a nationalist government – its first since the 1707 Act of Union united the English and Scottish Parliaments while preserving Scottish Law and the country’s courts.
While this nascent administration has faced some criticism that it has ‘hit the ground walking’, it is clear that its agenda is to be seen to put the interests of Scotland and its people foremost in what it does – without the need to toe a Westminster party line in the way the previous Labour-led coalition might have.
But what can we expect its impact will be on the Scottish property market and the way it should be approached by those within Scotland and outside?
The same, but different
Those with experience in the property market have always been aware that the Scottish market has had its own ways of dealing with things. Are these differences likely to widen or narrow over the coming years? The answer is, probably, a little bit of both.
Commercially, the property market in Scotland is one part of a larger UK market – subject to the same economic cycles, costs of borrowing and occupier and investor demand. Commercial practice in the property market also flows northward, with the Scottish market often seeking to align itself with wider UK practices.
This is no surprise – a substantial number of those involved in the property market in Scotland (be they investors, developers, occupiers or collateral professional disciplines) are based in England (and in particular in London) and their approach to commercial issues is often to seek to replicate English practice in Scottish deals. Overseas retailers or property investors coming to Scotland for the first time often have holdings south of the border and, again, approach the Scottish market having first sought to grapple with the English market’s practices.
It is highly unlikely that this is about to change. But there will continue to be differences. These arise from a number of factors, some of which are themselves changing and evolving.
First, closer alignment of many parts of property market practice would require legislative intervention. To give a few examples of current distinctions:
(i) in the residential market, the concept of leasehold ownership is effectively prohibited in Scotland;
(ii) in the commercial market, there is no equivalent to the statutory security of tenure afforded to tenants of English property by the Landlord and Tenant Act 1954;
(iii) the concept of privity of contract (and the 1995 legislative changes in England to partially remove it) never featured in Scottish law;
(iv) the concept of ‘squatters’ rights’ and ‘rights of light’ are essentially alien to Scottish law; and
(v) third party rights legislation does not apply in Scotland.
Issues such as these, if they were to be aligned with the English market, would require legislative change. The relevant powers are devolved to the Scottish Parliament and the current administration is not necessarily going to tinker for the sake of it – or intervene to level a playing field that might give competitive advantage to Scotland unless there are clear revenue benefits or other reasons for doing so.
Some legislative changes are on their way – albeit a year or more behind the equivalent English changes. So, for instance, the idea of the planning gain supplement was picked up by the last Labour-Liberal Democrat administration, despite misgivings in some quarters that its effects might be disproportionate given Scotland’s geographic make-up. Similarly, control on mezzanines (an issue particularly in the food retail market) is to follow in Scotland – but only a year or two later than in England, giving those who know this a chance to exploit the current lack of control on mezzanine-led expansion.
Is it local?
The Scottish Parliament has also been pushing its own legislative agenda independently of the Westminster Parliament. After much consultation, a new Planning Act has been passed, bringing with it quite considerable changes to the way in which the planning process will be governed. Time will tell what impact this has (and a lot will depend on whether local authorities are given the finance to recruit staff to administer it), but concepts such as community engagement, early consultation and good neighbour agreements are now on the Scottish statute book – forcing those who wish to engage with the planning process in Scotland to resource themselves accordingly and seek expert local advice.
There will also continue to be issues that are inherently local, but which will impact substantially on property matters. Attempts to adopt congestion charging in Edinburgh received a definite thumbs down and, while the new minority administration suffered a recent defeat at the hands of opposition parties in relation to Edinburgh’s tram proposals, the continuing uncertainty over the funding for phase two of that project could impact on some developers’ thinking.
The Edinburgh Airport Rail Link (Earl) also has a major question mark over it, with the administration declaring that a tunnel and station beneath the main runway are unnecessary; and the issue that is now starting to feature prominently in the minds of businesses across east-central Scotland, namely the second Forth crossing, is far from resolved.
The Glasgow Airport Rail Link (Garl) project appears under less threat, albeit with delays in completion expected, and Aberdeen’s long-awaited western peripheral route, too, appears to have a green light.
For the property and construction industries, however, the central message should be that there is significant infrastructure development in the pipeline, from which there will flow opportunities. Local connections could prove crucial, as will an understanding of the Scottish parliamentary system.
Second, it might be fair to say that Scotland’s property industry has (with the admirable exception in the residential market of Homes for Scotland) lacked a cohesive voice on commercial property matters. This is changing: with the recent creation of the Scottish Property Federation, allied to the British Property Federation, the Scottish commercial property market now has a voice, backed by a credible national lobbying organisation, able to share its views with the Scottish and national parliaments and to make itself heard.
In the past, attempts to adopt industry standards, for example, on flexible leasing, on rent review methodology or on control of subletting rentals have been proposed largely with an English view in mind. Many of the same issues arise in Scotland, but with their own nuances – the effective lack of any statutory backdrop in the commercial leasing market means that parties are, theoretically at least, free in Scotland to agree what they want on particular leasing issues. We can expect, and hope, that in the future the Scottish industry can participate in these debates and have a chance to shape the outcome as it happens, rather than follow the English lead like a reluctant younger sibling.
So what does all this tell us about the Scottish property market and the law firms that practise within it? A few things:
(i) one can hope to see an increasing convergence of best practice, particularly where industry-wide initiatives are concerned;
(ii) there have been, and will remain, significant differences in the legal systems; and
(iii) the Scottish Parliament has already shown its willingness to legislate and push an agenda independently. As ever, top-quality (local) legal advice is required.
Denis Garrity is head of real estate and Nick Scott head of the property industry group at Brodies