The most common forms of security over real estate are:
A standard security is a fixed charge over real estate assets owned by either an individual, a partnership, a trust or a company. In relation to residential properties, standard securities are commonly called mortgages, referring to the terminology of English law. In Scotland it is not possible to create any other form of fixed charge over land other than by way of a standard security. It ranks in preference to unsecured creditors and also to any floating charge. The standard security is a creature of statute; the Conveyancing and Feudal Reform (Scotland) Act 1970.
There are two forms of standard security and both forms (A and B) are laid down by the relevant statute in Scotland:
A Form B security may cover a long-term facility which is governed by a complicated facility letter or indeed several facility letters which specify the rights and obligations of the parties. Similarly, Form B may also be used where the obligations secured are not entirely monetary, for example where the security covers obligations covered in a contract between two parties or an option agreement.
It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignation whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower.
A corporate borrower can also create a floating charge. This is a charge over both real estate and moveable assets and as the name implies floats over the secured assets without attaching to any until the charge is crystallized. The procedural requirements for a lender to invoke its power of sale under a standard security mean that a floating charge and the flexibility it offers over the real estate in question is an important part of the security package in Scotland. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. The lender does not need to grant consent to the disposal of any assets secured just by a floating charge. It is, however, normal for a lender to take both a floating charge and a standard security.
As mentioned above, a standard security over real estate can be granted by anyone, including companies, limited liability partnerships, traditional partnerships and individuals. A floating charge cannot be granted by an individual.
A lender may also seek further comfort in addition to the above, for example:
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Real estate as security includes the land, buildings erected on it and fixtures which form part of those buildings.
It is also possible to take security over fittings, furniture and moveable objects by way of a pledge (or lien).
Title to land can be either heritable (full and unlimited in time) or leasehold, provided the lease is capable of registration in the Land Register of Scotland which means it must be for a term in excess of 20 years. However, not all registered leases are considered good security. For instance, most leases contain some form of ‘irritancy’ clause which allows the landlord to take back the property in certain circumstances. This is not satisfactory to a lender if one of those circumstances is the tenant's insolvency.
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The concept of a bare trust is not recognized in Scotland but trusts for specific purposes are recognized. However, there is no recognition of the split between a legal and beneficial owner. Trustees are legal owners and the beneficiaries in terms of a trust do not have a right of ownership in the real estate. The beneficiaries only become legally entitled to the real estate once the trust is dissolved or wound up and the real estate assets are conveyed to the beneficiaries. However, throughout the duration of the trust the beneficiaries will normally be entitled to the income from the real estate (depending on the terms of the trust).
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Debt is commonly traded between lenders. Syndicated lending documentation is becoming standardized on the terms of the Loan Market Association and this allows for free transferability of debt between lenders with the security being held on their behalf by a security trustee and the debt being administered by an agent.
In addition, there are several ways of transferring debt being:
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There are no restrictions on granting security to foreign lenders.
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There is no stamp duty in creating a security interest. There are also no notaries' fees.
A standard security is validly created and enforceable against third parties not when it is signed but when it is registered in the Land Register of Scotland. Prior to 1 April 2016 it was also possible to register a standard security in the historic property register known as the General Register of Sasines, (or ‘Sasine Register’) if the property over which the security was being granted was not yet registered in the Land Register. Until registration in the property register, the security is merely a bilateral agreement. There is a flat fee payable of £80 per title over which the security is granted for the standard security itself and an additional £20 registration fee for an ‘Advance Notice’ relating to the grant of the standard security in terms of which the security is protected against any competing deed presented for registration during a 35-day priority period. Since 1 April 2016 it has not been possible to register a new standard security in the Sasine Register, meaning that any property over which a standard security is to be created must first be registered in the Land Register. Where title to a property is being registered in the Land Register to enable the creation of a standard security over the whole of that property, the registration fee is waived in its entirety, although a £80 fee is still payable for the registration of the standard security.
The security is then perfected by registration at Companies House within 21 days of the date of registration at the Land Register of Scotland if the borrower is a company. If the security is not registered at Companies House, it is not enforceable against a liquidator or administrator in the event of the borrower's insolvency. The fee for registration at Companies House is £23 (£15 for online registrations).
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Yes, there are both financial assistance rules and corporate benefit rules which must be complied with.
Pursuant to section 678 of the Companies Act 2006, it is unlawful for a public company to provide financial assistance for the purpose of acquiring its own shares or the shares in its holding company. The statutory provision no longer applies to a private company (with certain exceptions where the shares are in its public holding company).
Directors must comply with both common law rules and provisions under the Companies Act 2006. To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution.
There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company enters into an insolvency process.
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There are no restrictions on payments made to foreign lenders under a security document or loan agreement.
A borrower may be required to deduct withholding tax in respect of interest which is payable to a foreign lender.
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More than one standard security may be granted over a single piece of real estate at the same time, as well as floating charges. The ranking of securities against one another in that situation determines how much of the value of the real estate is available, on enforcement, for repayment of each lender's debt.
Standard securities rank in priority by reference to their dates of registration in the Land Register unless varied by a separate agreement (ranking agreement) but all Standard Securities registered at the Land Register of Scotland will rank ahead of floating charges unless varied by express agreement.
Ranking will usually be expressly provided for by way of a separate agreement among the borrower and the various lenders although the simple postponement of one security to another may be contained within the security itself. Details of such agreements will vary from case to case and commonly will also deal with related matters such as each creditor's ability to enforce its security.
It should be noted that express ranking agreements must be recorded or registered in the appropriate Scottish Property Register.
If there is no express ranking agreement, standard securities over real estate will rank according to the dates on which they are recorded or registered in the appropriate Scottish Property Register. The earliest to be registered will rank first. In the absence of separate agreement or negative pledge, the first-ranking creditor enjoys priority only to the extent of advances made (or contracted to be made) before it receives notice of the existence of the later standard security, together with interest and expenses. Care must therefore be taken in agreeing to make any further advance and in capitalizing interest.
Normally, a standard security recorded or registered in the appropriate Scottish Property Register before any floating charge affecting the same real estate has crystallized will rank before the floating charge, regardless of the date of the floating charge. However, this will not be so where there is express provision to the contrary (ie in the ranking agreement) between the creditors or where a standard security is granted after a duly registered floating charge which contains an express prohibition against the creation of further securities by the debtor which rank equally with or in priority to the floating charge, without the consent of the holder of the floating charge.
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If a choice of law is a sensible choice (ie not chosen to deliberately avoid a national law or policy), the Scottish courts will give effect to it. It would probably not be sensible to choose a law other than Scottish law to govern a security document under which a Scottish company creates security over a Scottish asset. Where the asset that is the subject of the mortgage or charge is situated in another country, a security document governed by the law of that country will often be appropriate, and the choice of that law will be recognized by the local courts.
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Generally, a security interest created by a company has to be registered at Companies Registration Office within 21 days. If it is not so registered, it is void against a liquidator or administrator.
If it emerges that a standard security was not validly created because it was not registered at the Land Register of Scotland it can be registered at any time after it was signed (there is no time limit in that regard) but it will not rank ahead of any floating charges which crystallize before the standard security is registered at the Land Register. For a lender to have a right enforceable against third parties (distinct from the borrower) over the real estate, the standard security must be registered in the Land Register of Scotland. Prior to 1 April 2016 it was also possible to register standard securities in the historic Sasine Register and a large number of existing (and enforceable) securities are still registered there. However, since 1 April 2016 it has not been possible to register a new standard security in the Sasine Register, meaning that any property over which a standard security is to be created must first be registered in the Land Register.
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A holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not itself cause, or knowingly permit, damage to the environment.
Great care must be taken if the security is enforced because owners of land can be liable for environmental damage on that land or coming from it, even if they did not cause such damage. A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability.
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If the facility is on demand, all the lender need do is demand repayment, but the procedures laid down in the relevant legislation regarding enforcing a standard security outlined below must be strictly adhered to before seeking to enforce the remedies available to the lender.
More commonly, a term loan agreement will describe events of default which must have occurred before the lender can enforce its security. Typical events of default include non-payment of interest or principal, breach of representation, breach of covenant, material adverse change and insolvency.
Where a borrower is in default of the terms of a standard security the lender may exercise any of the following remedies which are set out in the relevant legislation:
Before the lender may exercise any of these remedies, certain preliminary steps must be taken. The steps taken by the lender will be dependent upon the situation which arises in relation to the subject of the security. They can be to:
There are certain factors to take into consideration before any action is taken:
There are a number of issues to consider where there are tenants occupying a building over which a security has been granted. The steps required will be dependent upon whether it would be the lenders intention to collect rents, sell the property subject to the leases or sell the property vacant.
The lender would need to consider changing the locks at the premises and in the event that they are empty arrange for them to be secured to prevent damage.
Another mechanism open to a lender to enforce its security (provided it has taken a floating charge) would be to consider the appointment of an insolvency practitioner through either a winding up petition or an administration. The insolvency practitioner could then take on the responsibility for concluding the sale of the real estate or management of any tenants.
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The principal rescue procedure is for the administration of the company. The administrator takes control over the whole of the company's assets with a view to producing a better result for creditors than if the company went into liquidation. Administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court.
A corporate voluntary arrangement is an agreement between the creditors of a company which typically involves arrangements for reduced payments to creditors. This has to be approved by a majority of creditors together holding more than three quarters by value, although this is not binding on secured creditors.
A scheme of arrangement is a statutory procedure under the Companies Act 2006 whereby a company may make a compromise or arrangement with its members or creditors. There is no prescribed subject matter of a scheme therefore in theory, a scheme could be a compromise or arrangement about anything that a company or its members agree among themselves. In contrast to the restructuring plan (see below), there does not have to be any financial distress in order for a company to enter into a scheme of arrangement therefore it can be used to effect a solvent internal reorganisation, merger or demerger.
However, it can also be used to achieve insolvent restructurings such as debt for equity swaps. Unlike with the restructuring plan, the scheme of arrangement does not have a cramdown feature (whereby a reorganisation plan is approved even though an entire class of creditors vote against it). The Scottish courts will not sanction a scheme unless each and every class of creditor/shareholder, has voted in favour of the scheme satisfying the required statutory thresholds.
However, as long as the requisite thresholds are obtained in each class, claims of secured creditors can be compromised without their unanimous consent. A scheme will not automatically itself trigger a moratorium/stay on creditor enforcement action or legal proceedings against the company therefore usually schemes are accompanied by standstill agreements (agreements pursuant to which creditors agree not to enforce security or demand payment of sums due for a period of time to allow a consensual restructuring to be negotiated).
The Corporate Insolvency and Governance Act 2020 which came into force on 26 June 2020 introduces two new restructuring tools: a free standing moratorium and a restructuring plan (occasionally referred to as the super scheme).
The moratorium can be used to support the rescue of a company as a going concern. It gives a company breathing space from creditor action to pursue a turnaround plan. During the moratorium period creditors/lenders will not be able to take enforcement action against the debtor company and landlords cannot exercise rights of irritancy.
The restructuring plan is a court supervised restructuring process, largely modelled on schemes of arrangement but with the addition of a cross-class cramdown mechanism. The restructuring plan can be used with or without the protection of the new moratorium.
A company which “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern” may make an application to use the restructuring plan process.
Dissenting creditors, including secured lenders, landlords and suppliers together with members of the company can each be bound by a plan if (i) at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, vote in favour; (ii) the dissenting creditors would not be any worse off under the plan than they would have been in the event of whatever the court considers would be most likely to occur in relation to the company should the plan be rejected; and (iii) the court is prepared to sanction the scheme.
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Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court.
Security can be set aside in certain circumstances including where it constitutes a gratuitous alienation or an unfair preference. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which varies depending on the circumstances) before the commencement of the insolvency process.
A floating charge granted by a company within 12 months of commencement of insolvency is invalid save where new money is advanced although in most circumstances, this provision does not apply unless the company was insolvent when it granted the security or became insolvent as a result.
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Standard securities rank in priority to each other by reference to their dates of registration in the Land Register (or Sasine Register) unless varied by a separate agreement (Ranking Agreement) but all Standard Securities that are (or were) registered at the Land Register of Scotland or Sasine Register prior to the attachment of any floating charges granted by the debtor will rank ahead of such floating charges (regardless of the date of registration of such floating charges) unless varied by express agreement.
In the absence of separate agreement or negative pledge, the first-ranking creditor enjoys priority only to the extent of advances made (or future advances contracted to be made) before it receives notice of the existence of the later standard security, together with interest and expenses.
Standard security holders are entitled to as much of the net proceeds of sale as is required to satisfy the debt (save where there is a postponed second standard security which has been notified to the prior ranking securing holder).
There are certain prior claims which apply to proceeds of realization of a floating charge. These include:
Unsecured creditors rank equally between themselves.
Administrators of incorporated companies may sell real estate subject to a floating charge and have a limited ability, with the consent of the court, to sell real estate secured by way of a standard security where the standard security holder is not prepared to consent to this. In each case, the price achieved may be less than that required to repay the secured debt in full.
A receiver may also seek the authority of the court to sell at less than the secured debt in certain circumstances, where the standard security holder is not prepared to consent to this.
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What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?
The most common forms of security over real estate are:
A standard security is a fixed charge over real estate assets owned by either an individual, a partnership, a trust or a company. In relation to residential properties, standard securities are commonly called mortgages, referring to the terminology of English law. In Scotland it is not possible to create any other form of fixed charge over land other than by way of a standard security. It ranks in preference to unsecured creditors and also to any floating charge. The standard security is a creature of statute; the Conveyancing and Feudal Reform (Scotland) Act 1970.
There are two forms of standard security and both forms (A and B) are laid down by the relevant statute in Scotland:
A Form B security may cover a long-term facility which is governed by a complicated facility letter or indeed several facility letters which specify the rights and obligations of the parties. Similarly, Form B may also be used where the obligations secured are not entirely monetary, for example where the security covers obligations covered in a contract between two parties or an option agreement.
It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignation whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower.
A corporate borrower can also create a floating charge. This is a charge over both real estate and moveable assets and as the name implies floats over the secured assets without attaching to any until the charge is crystallized. The procedural requirements for a lender to invoke its power of sale under a standard security mean that a floating charge and the flexibility it offers over the real estate in question is an important part of the security package in Scotland. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. The lender does not need to grant consent to the disposal of any assets secured just by a floating charge. It is, however, normal for a lender to take both a floating charge and a standard security.
As mentioned above, a standard security over real estate can be granted by anyone, including companies, limited liability partnerships, traditional partnerships and individuals. A floating charge cannot be granted by an individual.
A lender may also seek further comfort in addition to the above, for example:
Last modified 13 Mar 2025