Undertakings which may be given at settlement in relation to stamp duty land tax which do not impact on the classic letter of obligation

Over the last six months the Conveyancing and Tax Law Committees have been in negotiations with the Revenue to try to resolve the legal issues as to how stamp duty land tax (SDLT) fits into the Scottish system of property law. The Tax Law Committee has been leading the negotiations and the Conveyancing Committee has had a peripheral role in finding solutions to make the new rules workable for practitioners. One of these solutions will involve an extension to the letter of obligation.

In April the Conveyancing Committee published an article clarifying the classic letter of obligation. This article confirmed that the original idea of the letter of obligation is simply to fill the gap between settlement and registration. The letter of obligation was expanded to take account of an obligation to deliver a discharge of a standard security and the receipt for redemption of feuduty. Claims under these obligations carried no loading and no penalty provided that certain checks had been done and conditions complied with. At the end of last year the Master Policy insurers agreed that there would be no additional claim or loading where the period given in the letter of obligation was extended to 21 days. The information in the April article remains current but here we set out some new matters you may wish to consider following the introduction of SDLT.

It is clear that the new tax does not fit well into our Scottish property law and conveyancing system. Two particular areas of difficulty arise in relation to a landlord’s interest under a lease and a lender’s interest under a standard security.

In the case of a lease which runs for more than 20 years, it is in the tenant’s interest to have this registered in the Land Register as quickly as possible since there is no real right without registration. The landlord wants registration in the Books of Council and Session so summary diligence can be done if there are arrears.

Formerly there was a procedure whereby a solicitor could send a lease to the Land Register with a request to register it simultaneously in both. The tenant would often send the signed lease to the landlord with the completed land registration forms, a cheque for stamp duty and registration dues and the landlord then applied for registration. With SDLT this is not so easy. The tenant has to fill out the tax return and the SDLT certificate which is produced is delivered to the tenant or its agent.

A landlord who wants to ensure that the lease is registered in the Books of Council and Session as soon as possible, whether that lease is short or long, will normally want to make provision that the SDLT certificate is made available to it. Currently a landlord cannot ask for the certificate to be sent directly to it but it can make arrangements with the tenant to have it delivered. It is hoped that the Revenue will create a procedure to enable certificates to be sent to third parties soon.

The landlord can ask for the completed SDLT form and the cheque as settlement items and the tenant’s solicitor can grant an undertaking to the landlord’s solicitor obliging him/herself personally to deliver the certificate as soon as it is received and undertaking to tell the landlord’s solicitor of any requisition or response by the Revenue in relation to the SDLT application form. That obligation will include copying over the details of such a response or request. The undertaking can also contain an obligation, on behalf of the client only, to deal with those responses and requests. These first two obligations can be given personally because the undertaking to deliver the certificate only becomes enforceable when it is received, as does the undertaking to make known the Revenue’s response.

A lender is in a similar position to the landlord. It will often want to be in control of the disposition so that it can be recorded with the standard security as quickly as possible. Under the old procedure, the borrower would send the disposition to the lender together with stamp duty, registration dues and land registration forms so that the lender could send the documents for stamping and registration. Under the new SDLT regime, the borrower will have to fill in the SDLT return for the disposition and make application to the Revenue for the certificate.

Here again the undertaking will have a role to play. The borrower will be able to give the lender an undertaking to deliver the SDLT certificate when received and to inform the lender’s solicitor of any requisition or response by the Revenue. In turn there will be an obligation on the borrower (the client) to deal with any of those requisitions or responses.

If the lender really wants to be in control of the whole situation then it too can obtain the completed SDLT form and the cheque from the borrower or the borrower’s solicitor at settlement. In this way the lender’s solicitor will be able to submit the form to the Revenue. If either borrower or tenant delivers the form and the cheque to the lender’s or landlord’s solicitor as a settlement item, the borrower or tenant should obtain an undertaking from the lender or landlord to submit the form to the Revenue immediately following settlement (as it is the tenant or the borrower as the case may be who has the duty to do that and they will be penalised if the form is not lodged within 30 days).

None of these undertakings has any impact on the classic letter of obligation and the comments made on behalf of the Conveyancing Committee in the April Journal remain unaffected.

If you have queries about these procedures you can address them to the Conveyancing Committee by contacting the Committee Secretary Linsey Lewin, 0131 476 8174 or emailing her at linseylewin@lawscot.org.uk

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