House rules

Three recent Scottish deals have highlighted the issues that make large-scale voluntary transfers particularly complex.

At the heart of any large-scale voluntary transfer (LSVT) between a local authority and a new registered social landlord (RSL) is a property transfer. However, these are no ordinary conveyancing transactions. In the three transfers that have recently completed in Scotland, a conveyancing strategy has been adopted that would not necessarily be adopted in any other commercial transfer.
The completion of the housing stock transfers of the Scottish Borders Council, Glasgow City Council and Dumfries and Galloway Council highlight the issues that make these types of transfers special. In the first place there is the sheer complexity of the title position. The local authority or its statutory predecessors may have assembled their housing sites over a number of decades and possessed these sites on unchallenged boundaries. In some areas the local authority is the largest urban owner, and literally thousands of titles would need to be examined if a due diligence exercise were employed by the solicitors acting for the transferee. Add to this the fact that many of the individual housing units will have been sold under the right-to-buy legislation, and one has an extremely complicated title situation.
In Scotland, land registration has been creeping over the country since 1979, but most local authorities’ titles to their housing stock will pre-date the introduction of land registration. This adds another ingredient to the already complicated mix – namely that the conveyance or conveyances of the housing stock will result in applications for first registration in the Land Register and scrutiny by the officials of that register.
It must also be borne in mind that an LSVT is not simply a transfer of property for a fixed price. The local authority has a residual function as the housing authority and may have other responsibilities in relation to asylum seekers, homeless people and others.
There are also considerations concerning the Transfer of Undertakings (Protection of Employment) Regulations (Tupe) in relation to staff, especially direct labour organisations, and there will be service level agreements and, where appropriate, development
clawback and regeneration agreements. What this means, of course, is that very few LSVTs will be once-and-for-all affairs. The transferring authority may retain rights and duties, as will the new RSL.
It is simplistic, however, to advance the view that those advising the local authority should ensure that it retains as few liabilities as possible, while those advising the new RSL should ensure that it takes on as few responsibilities as possible, apart from the obvious one of managing the stock. One approach is to try to leave everything to the valuation of stock. While this sounds sensible in theory, it is impossible in practice. A valuer cannot possibly take into account everything that might happen in the future – and in any event, the valuation of the stock is an assessment of the tenanted market value, as opposed to an open market value.
Certain obvious things may well be taken into account in the valuation, but there will be many other things that are not. For this reason a series of indemnities are negotiated between the local authority and the new RSL. Here, of course, there should be no double counting. If a potential liability (for example a potential environmental liability) has been taken account of in the valuation, the local authority should not have to grant an environmental indemnity that may result in a further liability in the future.
Given the complexity of the conveyancing process, the property transfers in the three Scottish transactions were not dealt with on the basis of purchaser due diligence, but on the basis of title indemnities granted by the local authority. In conjunction with the Land Register of Scotland, plans of the various sites were prepared and the properties were conveyed in a number of deeds of transfer with plans attached. Since the Land Register is map-based, and since the conveyances would trigger applications for first registration, the Land Register was happy with this method of dealing with matters.
This, however, left the vexed question of guaranteeing that the local authority had a proper title to sell and the question of the usual observations and requisitions that would have resulted from a due diligence process.
Effectively, there are three ways of dealing with this. First, where there is a known title problem or defect, such as where it is recognised that the council has built on ground that does not belong to it, the matter can simply be cured at someone’s expense by acquiring the land from the owner.
Second, the matter may be simply accepted by the transferee and covered by a general indemnity covering good title against any future loss granted by the council.
Third, a specific title indemnity may be granted covering certain specified risks in relation to the particular property concerned. This third approach has benefits for both the local authority and the new RSL in that rights and liabilities are not left to the interpretation of a general title indemnity, to the effect that the council has a valid title to sell. From the council’s point of view, it knows specifically what it has to indemnify against in relation to a particular defect. A specific indemnity can also be useful where there is an ongoing situation or dispute that cannot be resolved by the council prior to the proposed completion date. With most LSVTs it is impossible to say at any point in time that everything has been agreed and every ongoing situation resolved. Of necessity, changes occur on a daily basis where housing stock is concerned.
What lawyers for both sides must appreciate is that, although the transfer of the housing stock is at the core of the agreement, the actual conveyancing process has to be seen and dealt with in the overall context of a housing function being transferred from one entity to another.
Solicitors, therefore, should not become bogged down in lengthy arguments about ‘nice’ points that, although of academic interest, lack commercial substance. For one thing, the clients on either side are unlikely to appreciate the importance of such distinctions (if there are any). What lawyers should aim to do is ensure that both clients understand the nature of the rights and obligations that have been placed on them, particularly those that will subsist post-transfer.
Professor Robert Rennie and Len Freedman are partners at Harper Macleod