Do landlords really understand their rights under hypothec in Scotland?

Scottish landlords have traditionally enjoyed the common law right of hypothec for centuries but despite being almost 10 years since modifications were imposed by section 208 the Bankruptcy and Diligence etc (Scotland) Act, 2007, it seems many landlords are still unsure of their rights.

Landlords can claim their right to hypothec without the need of court action.

Hypothec is basically a form of security that landlords hold over the realisation proceeds of moveable property, like equipment and stock, which is owned by their tenant and is held in the rented premises at the date of a formal insolvency. Thus, the landlord is entitled to be paid in preference to all other creditors and indeed the Insolvency Practitioners’ costs and fees.

The effect of hypothec is that the net value realised from the tenant’s moveable assets should be passed to the landlord up to the value of unpaid rent.  It is important to note, however, that they cannot claim for future rent, should the property lie empty, nor for dilapidations, but only for the rent outstanding at the date of the insolvency.

Whilst hypothec is an automatic right, in practice, landlords should intimate their claim to the Insolvency Practitioner involved as soon as possible.  Similarly, where the claim is in respect of a commercial premises, the Insolvency Practitioner may want to trade on to maximize returns or even rescue a business, so it is also prudent to immediately ascertain the Insolvency Practitioner’s intentions and agree ongoing rent in addition to the hypothec claim.

It was previously noted that a hypothec claim does not crystalize unless there has been an insolvent event thus without such a process, the landlord’s options for recovery of arrears are the same as any other creditor.   However, where often a creditor sees no benefit in meeting the additional costs of petitioning for liquidation or sequestration, there may be instances where substantial arears have accrued when it is in the landlord’s best interest to petition for the insolvency thus affording them the opportunity to potentially recover their premises in addition to the rent arrears.

If you, or your clients, have any queries regarding hypothec please do not hesitate to contact a team member in Business Recovery and Insolvency.