Real Estate Finance Investment

Real Estate Finance (Investment): What you need to know about the Moveable Transactions Act

The Moveable Transactions Act (the “Act”) was passed by the Scottish Parliament in May 2023 and will make fundamental, and very positive, changes to the commercial landscape in Scotland when it comes into force.

We expect that the Act will come into force in Summer 2024, although no date has been confirmed yet. The Act modernises the law relating to the creation of security over contractual rights and creates a new security right (the statutory pledge).

What is changing?

When the Act comes into force, it will change how companies create security over their Scottish assets. It will be easier to use valuable contractual rights, such as the right to receive rental income or rights arising under management agreements or relevant construction contracts, as security for borrowings. It will also be possible for companies to create a new type of security called a statutory pledge over their moveable assets in Scotland, such as plant and machinery, vehicles and stock in trade. Currently the only way to create security over these types of assets is to transfer possession of them to a lender (which is impractical in the vast majority of cases) or grant a floating charge.

Whilst the new legislation proposes new opportunities in terms of what assets can be secured, the process of securing these assets has also been modernised. When securing assets by assignation, there currently is the requirement to intimate the security to the third party (which can be an arduous process when this involves a number of parties). This usually involves intimation by post which can be costly and be particularly so and uncertain when it involves overseas parties, or where the parties do not acknowledge receipt. The notice process will become more streamlined in that electronic notices will be permitted, including by portal or a simple email. Further and alternative to the notice process, there will be a new Register of Assignations: where the assignation (in security) can be registered to avoid this notice process completely.

How will this impact on Investment Property Finance?

Process: In the context of investment property, where there are often multiple third parties involved, the notice process will be more straightforward. For example, where the chargor is the landlord of a shopping centre with many tenants, electronic intimation should speed up the notice process and alleviate the need to potentially send notices far and wide to where the various tenant entities and/or their guarantors (under the leases) are based. Furthermore, by using the Register of Assignations, this eliminates the need to intimate to potentially hundreds of tenants in a block of flats or student accommodation. This is of course important for ease, but would also mean the transaction retains an element of confidentiality – unless the tenants (or other third party) checked the register, they would not know of the assignation.

We do not know yet what borrowers or lenders may prefer but the possibility of these options offers flexibility to both parties to a financing transaction and the ability to tailor the process of what can often be complex transactions.

Potential assets: In respect of income from real estate, such as rent, the law currently requires each stream of income to be secured as a right in itself. The Act provides for future rights to be secured, i.e. all income, current and future, from an asset could be secured. Securing future rights could also be relevant where contracts are of a shorter duration, such as insurance policies over investment property. Lender's will also have more certainty over ensuring that future rights are effectively secured which also, gives borrowers more flexibility. This concept, along with the smoother intimation process, will make it easier for more property related contracts to be secured, including construction contracts and collateral warranties.

In terms of the potential assets that could be secured in a real estate finance transaction, the new legislation extends this with the new statutory pledge, which means that machinery, equipment, stock and other valuable assets held within the property can be effectively secured. Previously, fixed security over such assets was not practically possible as it involved the lender having possession or effective control over those assets. The new statutory pledge will be available to a variety of entities, unlike the current floating charge (which is only available to companies).