SDLT WORDING AND PROCEDURES Practice Note re Lease Transactions and Lending Transactions

Transcription

1 SDLT WORDING AND PROCEDURES Practice Note re Lease Transactions and Lending Transactions 1. Lease transactions (a) General Commentary The principal difference in procedure that the new Stamp Duty Land Tax regime imposes arises as a consequence of the statutory duty placed on the purchaser/tenant/assignee to make a tax return in respect of the land transaction in question, with penalties for late submission or failure to submit. Whereas in the past, it has been common practice for a tenant to pass a cheque for stamp duty to the landlord's solicitor who then attends to stamping and registration, there is now a shift in emphasis which means that a tenant will want to have control of the submission of the SDLT return to ensure that it is able to comply with its statutory liability. At the same time the landlord wants to retain a measure of control over the whole stamping/registration procedure, as extracts cannot be obtained until an SDLT Certificate is available (either after payment of the tax or on production of a self-certificate), and the landlord is concerned to ensure that the lease is registered in the Books of Council and Session, firstly to ensure that for management and record purposes the lease has been preserved and secondly, so that it is able to execute summary diligence in the future if there are arrears of rent. It is of course very much in the interests of the tenant to register the lease in the Land Register (where applicable) (although the landlord will not be so concerned about this form of registration), and an SDLT Certificate is also a pre-requisite for Land Registration. In the case where the Landlord is dealing with registration of the Lease in the Books of Council and Session, it would be open to the parties to amend the drafting to provide for the Landlord to submit the Lease for registration in the Land Register at the same time rather than the Tenant waiting for their extract prior to submitting it for Land Registration. The following wording seeks to accommodate as far as can be, the interests of both parties. Alternative wording is provided for circumstances where the tenant will deal with the registration procedure as well, where the landlord has no objection. The PSG approach has been to amend existing procedures only so far as necessary to accommodate the new regime and the liabilities it imposes, and suggests that the first alternative, which retains most of the status quo will be the procedure most frequently adopted. This wording pre-supposes that the "effective date" for SDLT purposes is going to be the last date of signing of the lease. The landlord should execute the lease first, so that the tenant will be in control of its own execution of the lease, which is the trigger for the tenant's liability to submit an SDLT return and pay the tax (if any) within 30 days. The same principle applies to execution of an assignation, where the assignee should be the last to sign, as it is the party liable to make any return and pay any tax. For cases where the effective date arises before the lease is executed see paragraph (d). Costs are also covered and disbursements (in particular the cost of Extract dues) should be paid to the landlord's solicitor at completion, so that it is in funds to meet the cost of the extracts when received. The model clause assumes that the current practice of each party bearing their own legal etc costs will Version Superseded by Version 2 March 2005

2 2 apply, although provides for alternative wording in cases where the tenant is bearing the whole costs of the transaction. (b) Wording for Offer to Lease 1 Completion of Lease 1.1 As soon as reasonably practicable following conclusion of the Missives the Lease will be completed by the insertion of any relevant information required and engrossed. The Landlords will execute the Lease within [21] days of the date of engrossment, and thereafter it will be sent to you for execution by the Tenants. 1.2 The Tenants will ensure that the Lease is validly executed by the Tenants and returned to the Landlords' Solicitor within [21] days of the date of delivery of the engrossment to the Tenants' Solicitor together with evidence of the valid execution of the Lease and if the transaction contemplated by the Missives is not notifiable for stamp duty land tax purposes, a completed and signed Self Certificate (SDLT60). 1.3 If the transaction contemplated by the Missives is notifiable for stamp duty land tax purposes, the Tenants will submit to the Inland Revenue within [14] days of the effective date of the transaction a completed and signed SDLT1 form (with the Agent's address selected as the response to Question 58) together with any applicable supplementary forms and the stamp duty land tax (if any) arising from the land transaction contemplated by the Missives. 1.4 If prior to the issue of a Land Transaction Return Certificate (SDLT5) the Inland Revenue rejects the Tenants' SDLT application, the Tenants will without delay (i) provide the Landlords with a copy of any such rejection and other relevant correspondence and (ii) correct the application and resubmit it and a remittance for the correct amount of the stamp duty land tax to the Inland Revenue. 1.5 Within 7 days of receipt from the Inland Revenue, the Tenants will deliver to the Landlords' Solicitor the Land Transaction Return Certificate (SDLT5) issued by the Inland Revenue. 1.6 The Landlords will, within 7 days of receipt of the SDLT5 /SDLT60 from the Tenants, submit the Lease and the SDLT5 /SDLT60 to the Books of Council and Session for registration for preservation and execution and will obtain [3] extracts thereof. Within 7 days of receipt, the Landlords will return the SDLT5/SDLT60 to the Tenants, and one extract of the Lease. 1.7 The Tenants acknowledge that if they breach the terms of their obligations in Clauses 1.2 to 1.5 inclusive they will indemnify the Landlords in respect of loss suffered by the Landlords by virtue of such delay. 1.8 If the Lease qualifies to be registered in the Land Register of Scotland, the Tenants will be responsible for dealing with such registration and will deliver to the Landlords (i) within 14 days of the Landlords' return of the SDLT5/SDLT60 to the Tenants in accordance with Clause 1.6, a copy of the receipted Form 4 showing the Title Number to be allocated to the Title Sheet for the Tenants' interest and (ii) within 7 days of receipt by the Tenants of a Land Certificate in respect of that interest, a copy of the Land Certificate, with a colour copy of the Title Plan(s). Alternative wording for use where the Tenants are to be responsible for SDLT submission and registration 1.1 As soon as reasonably practicable following conclusion of the Missives the Lease will be completed by the insertion of any relevant information required, and engrossed. The Landlords will execute the Lease within [21] days of the date of engrossment, and thereafter it will be sent to you for execution by the Tenants. 1.2 The Tenants will ensure that the Lease is validly executed by the Tenants and that a certified copy of the Lease is returned to the Landlords' Solicitor within [21] days of the date of delivery of the engrossment to the Tenants' Solicitor together with evidence of the valid execution of the Lease.

3 3 1.3 If the transaction contemplated by the Missives is notifiable for stamp duty land tax purposes, the Tenant will submit to the Inland Revenue within [14] days of the effective date of the transaction a completed and signed SDLT1 form (with the Agent's address selected as the response to Question 58) together with any applicable supplementary forms and the stamp duty land tax (if any) arising from the land transaction contemplated by the Missives. 1.4 If, prior to the issue of a Land Transaction Return Certificate (SDLT5), the Inland Revenue rejects the Tenants' SDLT application, the Tenants will, without delay (i) provide the Landlords with a copy of any such rejection and other relevant correspondence and (ii) correct the application and resubmit it and a remittance for the correct amount of the stamp duty land tax to the Inland Revenue. 1.5 Within 7 days of receipt by the Tenants of the SDLT5 from the Inland Revenue, the Tenants will submit the Lease and the SDLT5 to the Books of Council and Session for registration for preservation and execution and will obtain [3] extracts thereof, and will deliver [2] of the extracts to the Landlords' Solicitor for the use of the Landlords within 7 days of receipt of the extracts. 1.6 The Tenants acknowledge that if they breach the terms of their obligations in Clauses 1.2 to 1.5 inclusive, they will indemnify the Landlords in respect of loss suffered by the Landlords by virtue of such delay. 1.7 If the Lease qualifies to be registered in the Land Register of Scotland, the Tenants will be responsible for dealing with such registration and will deliver to the Landlords (i) within 14 days of delivery of extracts of the Lease, a copy of the receipted Form 4 showing the Title Number to be allocated to the Title Sheet for the Tenants' interest and (ii) within 7 days of receipt by the Tenants of a Land Certificate in respect of that interest, a copy of the Land Certificate, with a colour copy of the Title Plan(s). 2 Costs (c) The Tenants will be responsible for [the legal [and other] costs and expenses reasonably and properly incurred by the Landlords in connection with the transaction, and for] the stamp duty land tax (if any) and the costs of registering the Lease in the Books of Council and Session and of obtaining [3] extracts ([2] for the Landlords and one for the Tenants) [and of registering the Lease in the Land Register]. The whole such costs and expenses incurred by the Landlords including the costs of registration in the Books of Council and Session will be due and payable by the Tenants on or before the Date of Entry, or the effective date of the transaction if earlier. Undertakings to be given While the suggested wording above may appear to be overly detailed, by making such specific provision in the Contract, the necessity for providing undertakings at settlement concerning the SDLT procedures is eliminated. In practice it will be the solicitors acting for the tenant and the landlord who attend to presentation of the lease to the Inland Revenue and the presentation for registration in the Books of Council and Session. They will do so on behalf of their client and in accordance with the provisions to which their client has contractually committed itself. Any requisitions made by the Inland Revenue will be referred to the tenant's solicitor, provided the tenant has selected "Agent" as the response to Question 58 in the SDLT form and answered "Yes" to Question 59. It may be necessary for existing procedures in transactions to be amended slightly or tightened up. Whereas the usual procedure up until now has been for the engrossed lease to be sent to the tenant to sign first and then to the landlord (often with no time limit imposed on the landlord's execution, and certainly with the expectation that the signed lease may not be available at settlement) the suggested wording provides for the lease to be sent to the landlord first, with the tenant being the last signatory. The rationale for this is that, in the absence of substantial performance by other means, completion of a lease for SDLT purposes occurs on the last date of signing (or constitution by any means), this date may be the effective date which triggers the SDLT liability, and it is clearly appropriate that the tenant, on whom that liability falls, should control or at any rate be aware of the date of that trigger.

4 4 It will also be incumbent on tenant's solicitors to ensure that they are in possession of an executed SDLT1 or SDLT60 form and any other supplementary forms required in time for settlement. It then becomes a matter of timetabling the various steps in the process and practitioners may find it useful to have a simple checklist to follow to ensure smooth administration of post-completion matters and avoid the need for unnecessary correspondence between the solicitors in the period following settlement. (d) Section 44(8) Finance Act double notification The requirement to notify the lease transaction to the Inland Revenue can arise if there is "substantial performance" of the contract before the date of signing of the lease. In that case, the date of substantial performance will be the effective date from which the 30-day period (within which notification and payment (if any) has to be made) starts to run. In the case of leases, there is substantial performance when the first payment of rent is made or when possession is taken, so in the typical case where there is an agreement for lease, or missives are concluded for the lease of a property and the tenant takes entry and pays rent on the strength of the contract, with the lease to be finalised, engrossed and signed thereafter, the effective date is the date of entry and/or payment. The SDLT1 and SDLT4 forms have to be submitted and any tax paid, and an SDLT5 Certificate will be issued by the Inland Revenue at that stage. However in terms of Section 44(8) of the Finance Act 2003, when the contract is subsequently completed by a conveyance, which includes a lease, there is in effect a second effective date for SDLT when the lease is signed, the practical effect of this being that the tenant has to notify again to the Inland Revenue which will result in the issue of a second certificate. For the purposes of registering the lease in the Land Register or Books of Council and Session, however, it appears that the Keeper will accept the first certificate and will not require to see the second one. As the landlord therefore has no interest in whether or not the tenant submits the second notification, the Group has concluded that there is no need for any additional wording in these circumstances. It is understood that the Inland Revenue intends to re-examine this issue either in the Finance Bill this year or in secondary legislation. 2. Lending Transactions Because of the imposition of liability on the purchaser/tenant/assignee to make a tax return in respect of the land transaction in question, with penalties for late submission or failure to submit, a similar situation arises with the borrower in transactions where funding is being made available by a third party. Typically, the lender's solicitors have been accustomed under the old stamp duty regime, to receiving all documentation, and cheques for stamp duty and registration dues, in advance of the release of the loan funds, to be held on an undelivered basis, so that upon release of loan funds and settlement of the purchase price, they are then in a position to stamp the borrower's disposition, and take or send that deed along with the standard security in favour of their lender client to the registers, to ensure that the lender's security can be perfected as soon as possible. Under the new SDLT regime, the borrower is in the same position as the tenant in relation to liability for making the appropriate SDLT return, although the lender in these circumstances has compelling reasons to require the SDLT return and payment of SDLT (if any) to be made expeditiously, as without the SDLT Certificate, the lender is unable to register its security, leaving it exposed for so long as the Certificate has not been issued and the disposition and standard security remain unregistered. For this reason the Group take the view that as the lender's and the borrowers need for registration are equally balanced, there is a case for the current practice to continue, although accompanied by an undertaking, given the penalties which may fall upon the borrower if the submission is not made or made late. Where Borrower to submit SDLT application If the borrower insists on attending to the submission of the return to the Inland Revenue then the borrower's solicitor should undertake to the lender to submit the application and payment within a short period of time and deliver the SDLT5 as soon as received. The lender should be satisfied that

5 5 the key questions in the SDLT1 form have been completed (name of purchaser, address of property, amount of consideration, effective date etc), that the SDLT form has been signed and that funds for any SDLT payment are available. Given the risk of exposure to the lender of any delay in registering the borrower's title and the security the lender will inevitably insist as a condition of releasing funds that the SDLT is paid immediately and the SDLT5 produced to the lender to allow immediate registration, the borrower's solicitor should be able to take advantage of the Special Arrangements for Personal Presentation at Edinburgh that have been agreed with the Inland Revenue, since otherwise the lender will not release funds to allow settlement. The Edinburgh Stamp Office of the Inland Revenue have been applying a strict two working-day rule to permitting this service to be used, and will return unprocessed any applications where the effective date of the transaction occurred more than two working days before the date of personal presentation. The following suggested style Letter of Undertaking might be appropriate for the borrower's solicitor to grant in these circumstances. As with any undertaking which is being granted by the firm, the borrower's solicitor should ensure that implementation of the undertakings (other than those on behalf of the client) is entirely within its control (e.g. it has funds to pay the SDLT, or is in possession of a signed SDLT1 form etc): Dear Sirs [ ]("Borrower") [ ]("Lender") [ ]("Property") With reference to the completion of this transaction [today][on [ hereby:- (i) (ii) (iii) (iv) ] ("effective date")], we undertake to submit the SDLT1 and cheque or other payment for the SDLT due within two working days of the [date hereof][effective date] to the Inland Revenue[by way of Special Presentation at Edinburgh] undertake to deliver the SDLT5 to you as soon as it is received by us, undertake to advise you of any rejection by the Inland Revenue of the Borrower's SDLT application, prior to the issue of an SDLT5 Certificate, and provide you with a copy of any such rejection and other relevant correspondence [and] in the event of any rejection by the Inland Revenue, undertake on behalf of the Borrower, to correct the application and resubmit it and a remittance for the correct amount of stamp duty land tax to the Inland Revenue without delay. Yours faithfully, Where Lender to submit SDLT application If the lender insists on attending to the submission of the SDLT return to the Inland Revenue, as is likely in the majority of cases then the lender's solicitor should undertake to the borrower to submit the application and payment immediately. The question of attending to any delivery of the SDLT Certificate and dealing with any rejection by the Inland Revenue should also be addressed as these will both be sent to the Borrower or their Agents. The following are the suggested styles of Letters of Undertaking which might be appropriate to exchange in these circumstances. As with any undertaking which is being granted by the firm, the borrower's or lender's solicitor should ensure that implementation of the undertakings (other than those on behalf of the client) is entirely within its control (e.g. it has funds to pay the SDLT, or is in possession of a signed SDLT1 form etc): 1 Undertaking from the Lender's Solicitors to the Borrower's Solicitors

6 6 Dear Sirs [ ]("Borrower") [ ]("Lender") [ ]("Property") With reference to the completion of this transaction [today][on [ hereby:- (i) (ii) (iii) ] ("effective date")], we undertake to submit the SDLT1 and cheque or other payment for the SDLT due within two working days of the [date hereof][effective date] to the Inland Revenue [by way of Special Presentation at Edinburgh], undertake to present the Disposition in favour of the Borrower for registration in the Land Register as soon as reasonably practicable after receipt by us of the SDLT5 Certificate, undertake without delay, (i) to advise you of any rejection by the Inland Revenue of the Borrower's SDLT application, prior to the issue of an SDLT5 Certificate, and (ii) provide you with a copy of any such rejection and other relevant correspondence. Yours faithfully 2 Undertaking from the Borrower's Solicitors to the Lender's Solicitors Dear Sirs [ ]("Borrower") [ ]("Lender") [ ]("Property") With reference to the completion of this transaction [today][on [ hereby:- (i) (ii) (iii) ] ("effective date")], we undertake to deliver to you the SDLT5 within 1 working day if it is received by us, undertake without delay, (i) to advise you of any rejection by the Inland Revenue of the Borrower's SDLT application received by us, prior to the issue of an SDLT5 Certificate, and (ii) provide you with a copy of any such rejection and other relevant correspondence received by us, and in the event of any rejection by the Inland Revenue, undertake on behalf of the Borrower, to correct the application and resubmit it and a remittance for the correct amount of stamp duty land tax to the Inland Revenue without delay. Yours faithfully