21 R Goode, "Proprietary Restitutionary Claims" in W R Cornish and G Virgo (eds) *Restitution: Past, Present and Future* (1998), ch 5; R Goode, "Property and Unjust Enrichment" in A Burrows (ed), *Essays on the Law of Restitution* (1991) ch 9; R Goode, "Proprietary Liability for Secret Profits – A Reply" (2011) 127 LQR 493-95.

22 S Worthington, "Fiduciary Duties and Proprietary Remedies: Addressing the Failure of Equitable Formulae" [2013] CLJ 720-52.

23 P Millett, "Bribes and Secret Commissions" [1993] RLR 7-30; P Millett, "Bribes and Secret Commissions Again" [2012] CLJ 583-614.

24 L Smith, "Constructive Trusts and the No-profit Rule" (2013) 72 CLJ 260-63.

25 Further valuable contributions to the debate include G Virgo, "Profits Obtained in Breach of Fiduciary Duty: Personal or Proprietary Claim?" (2011) 70 CLJ 502-04 and D Hayton, "Proprietary Liability for Secret Profits" (2011) 127 LQR 487-93.

26 T Etherton, "The Legitimacy of Proprietary Relief" (2014) 2(1) *Birkbeck Law Review* 59-86, 62.

#### *104 Defects in Acquisition and How to Fix Them*

*FHR* gives an answer to this debate for the purposes of English law. A principal enjoys a proprietary remedy against his agent in relation to benefits such as bribes which were not derived from the principal's assets or from assets which should have been the property of the principal. In the case of *FHR* one might readily assume that the vendor would have accepted a lower price for the shares in the hotel company if it had not had to pay the commission; but the rule did not turn on evidence that the purchaser had suffered any loss. The rule is simple: "any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for his principal."27 Thus the principal can require the agent to account for any such benefit or he can claim the beneficial ownership of the funds or assets which the agent has obtained. The principal may also trace or follow in equity the proceeds of the bribe or commission in the hands of knowing recipients, a remedy which would not be available unless he had a proprietary claim. Lord Neuberger observed that this view was consistent with other common law jurisdictions, notably Australia, New Zealand, Singapore and the United States of America.

#### (2) Remedies for breach of fiduciary duty in Scots law

Where does Scots law stand on this issue?

Agency plays a central role in our commercial life. Company directors, solicitors, financial advisers, commercial representatives and many others operate through the law of agency. While James LJ may have been guilty of overstatement when he suggested that the "safety of mankind" required the enforcement of the no profit rule without any inquiry as to whether the principal had suffered loss,28 the strict enforcement of an agent's duty of loyalty plays a vital role in our commercial law. The "no conflict" and "no profit" rules are essential components of the law of agency and are well vouched in Scots law. An agent who profits from his agency in breach of his fiduciary duty must disgorge his profits to his principal. That is not in doubt. But there is uncertainty in Scots law as to the legal mechanisms by which a principal can obtain a remedy for a breach of fiduciary duty.

27 *FHR* (n 14) at para 35.

28 *Parker v McKenna* (1874) 10 Ch App 96 at p 124.

The discussion in the English case of *FHR* is useful as it focused on three different circumstances in which an agent may act in breach of his fiduciary duty. They were:

The Supreme Court has ruled that in each case English law allows the principal a proprietary remedy which prevails in the agent's insolvency and also allows equitable tracing.

A Scots lawyer may have difficulty in seeing a basis for a proprietary claim in the second and third circumstances because Scots law has no equitable rule treating as done that which ought to have been done.29 Nonetheless, there are several statements in Scots cases30 and in textbooks31 that suggest that a constructive trust may arise where a person in a fiduciary position breaches his duty to his principal. Thus in volume 24 of the Stair Memorial Encyclopaedia the learned authors state:32

A constructive trust arises from circumstances where a person in a fiduciary position derives a benefit from that position or a trustee makes a profit from carrying on the truster's business.

But, as those authors acknowledge, it is not clear what is meant by "constructive trust;" and they refer to McLaren's comment that a constructive trust is "merely another name for the duty of restitution, which may be

29 *Mansfield* (n 6).

30 *York Buildings Co v MacKenzie* 13 May 1795, 3 Pat 378, Lord Thurlow at 393; *Hamilton v Wright* (1839) 1 D 668, Lord Cockburn at 673 (an obiter dictum as Wright was a trustee under an express trust); *Laird v Laird* (1858) 20 D 972, Lord President McNeill at 981 (again obiter); *Aberdeen Railway Co v Blaikie Brothers* (1853) 1 Macq 461 in which it was suggested by the Lord Chancellor and Lord Brougham that the laws of Scotland and England were essentially the same in relation to fiduciary relationships.

31 J McLaren, *Wills and Succession*, 3rd edn (1894) para 1926f; A Mackenzie Stuart, *The Law of Trusts* (1932) 37-38; W A Wilson and A G M Duncan, *Trusts, Trustees and Executors*, 2nd edn (1995) para 6.5-6.81.

32 D M Ross et al, "Trusts, Trustees and Judicial Factors," in *The Laws of Scotland: Stair Memorial Encyclopaedia*, vol 24 (1990) para 30.

enforced against a party acquiring property dishonestly or in breach of trust."33

In this essay I do not use the term "constructive trust" in that wider sense. Nor do I discuss the remedial constructive trust, which some common law jurisdictions recognise but English law does not. Rather, I concentrate on the institutional constructive trust in English law which arises by operation of law and which may exclude the assets held on trust from the insolvency of the fiduciary and the third party recipient. Does Scots law have such a trust arising from a fiduciary relationship? If so, what is its scope?

Before examining authorities which address directly the existence of such an institutional constructive trust, it may be useful to look at other remedies which Scots law provides in order to provide context for that examination. It is an established principle of Scots law that no man may profit from another's fraud;34 and that has been extended to a principle that no man may profit from another's breach of fiduciary duty.35 Professor Niall Whitty has discussed this in some detail in his powerful and convincing critique36 of the First Division's novel reliance on the English doctrine of "knowing receipt" in *Commonwealth Oil & Gas Co Ltd v Baxter*. 37 In short, if a trustee or other fiduciary profits from his office without the informed consent of the beneficiary or principal, the latter can demand an accounting and insist upon the performance of the trust or fiduciary obligation by transfer of the profit or asset to the trust patrimony or to the principal. This is a personal claim which is part of the law of obligations rather than a proprietary claim. Where the property in question is transferred to a third party, the beneficiary or principal will in many cases have a personal claim against the third party recipient where the third party has received the property (i) gratuitously or (ii) in bad faith with notice of the fraud or breach of fiduciary duty. In the first case (gratuitous transfer) the beneficiary or principal has a claim for restitution in our law of unjustified enrichment;38 in the second case (bad faith) he can rely on the "no profit from another's

33 Ross et al, "Trusts" (n 33) para 30, fn 1, referring to McLaren, *Wills* (n 31) para 1517.

34 *Clydesdale Banking Co v Paul* (1877) 4 R 626; *Thomson v Clydesdale Bank* (1893) 20 R (HL) 59; *New Mining and Exploring Syndicate Ltd v Chalmers and Hunter* 1912 SC 126.

35 *Style Financial Services Ltd v Bank of Scotland* 1996 *SLT* 421; *Bank of Scotland v Macleod Paxton Woolard & Co* 1998 *SLT* 258; *Macadam v Grandison* [2008] CSOH 53.

36 N R Whitty, "The 'No Profit from Another's Fraud' Rule and the 'Knowing Receipt' Muddle" 2013 *Edin LR* 37-62.

37 2010 SC 156.

38 *New Mining* (n 34).

breach of fiduciary duty" principle.39 Thus where no claim is being made to recover an asset in the insolvency of the fiduciary or of the third party recipient, Scots law has remedies in its law of obligations which do not depend on the concept of the constructive trust.

That has not prevented judges and jurists from using language that suggests that personal remedies against the fiduciary and a third party recipient arise as a result of a constructive trust. Professor George has demonstrated in his article, "Constructive Trusts" that most of the cases cited in connection with constructive trusts concern other aspects of fiduciary relations.40 Even the comparatively recent case of *Huisman v Soepboer*, 41 could be said not to be concerned with an institutional constructive trust which had effect on insolvency. The case concerned a claim by a partner for a profit share of a joint venture to purchase and resell a farm. Huisman sued one of his co-venturers, Soepboer, and also a company controlled by the first defender. Soepboer had taken title to the farm in the name of the company contrary to the terms of the joint venture agreement. Huisman sought a joint and several decree against Soepboer and the company for payment of the profit share on the sale of the farm on the basis that the company obtained its title in bad faith. Lord Penrose upheld the relevancy of the claim and, relying on the English case of *Soar v Ashwell*42 and Scottish textbooks, held that there might be a constructive trust and that the company might be liable jointly and severally with Soepboer. In my view it was not necessary to attribute that liability to the existence of a constructive trust, as Lord Penrose did. The joint and several liability of the defenders could rest on the principle of no profit from a breach of fiduciary duty.

There are other cases where the Scottish courts have asserted the existence of a trust but have not analysed the meaning of the deemed trust or its effect, if any on the insolvency of the deemed trustee. For example, there is a suggestion in *United Horse Shoe and Nail Co Ltd v Stewart & Co*43 that a claim for the profits arising from an infringement of a patent is based on treating the infringer as if he were a trustee for the patentee. In *Stevenson v Wilson*44 the trustee in sequestration of a partnership sold

39 The giving of valuable consideration is no defence if the third party is in bad faith: *Clydesdale Banking Co v Paul* (n 34) and *Bank of Scotland v Macleod Paxton Woolard* (n 35).

40 G L Gretton, "Constructive Trusts" 1997 *Edin LR* 281-316 and 408-19.

41 1994 *SLT* 682.

42 [1893] 2 QB 390.

43 (1886) 14 R 266, Lord Kinnear at 270; (1886) 15 R (HL) 45, Lord Watson at 48.

44 1907 SC 445.

shares in a private company, the purchaser paid the price but the directors refused to register him as the proprietor of the shares and the vendor declined either to rescind the sale and repay the price or to receive the dividends on the purchaser's behalf. The First Division treated the vendor as a quasi-trustee and upheld a declarator that the purchaser had the sole beneficial right, title and interest in the shares and dividends. The opinions in the Outer House and Inner House contained no detailed discussion of relevant authorities and the decision seems a pragmatic way of forcing the trustee in sequestration to annul the contract if he wished to wind up his administration of the bankrupt estate. I agree with Lord Hope's view45 that the circumstances of that case were special and they do not ground any general rule.

But there is also clear authority in Scots law for the existence of an institutional constructive trust as an incident of a fiduciary relationship.46 In my view the cases where the court has treated money or assets which a solicitor or factor has received from his client for a specific purpose as belonging to a separate patrimony and thus excluded from the former's insolvency are consistent with an implied trust or an institutional constructive trust.

Thus in *Macadam v Martin's Trustee*47 a solicitor received funds for investment in a heritable security but died before making the investment. The First Division excluded the funds from the solicitor's insolvency because they had been acquired for a specific purpose and had to be applied for that purpose or returned to the owner.

In *Colquhoun's Trustee v Campbell's Trustees*48 the court was faced with an insolvency. A solicitor was instructed by two clients to obtain securities over land for advances which the clients made to a third party. The solicitor received bonds and dispositions in security from the third party borrower in favour of his clients but did not record them.  The estates of the solicitors' partnership and the partners were sequestrated; prior bondholders sold the security subjects and there was a competition in a multiplepoinding between the

45 *Sharp* (n 2) at 480H-481B.

46 Professor George Gretton (n 40) argued for the abolition of the constructive trust but did not dispute its existence.

47 (1872) 11 M 33. See also *Blyth v Maberley's Assignees* (1832) 10 S 796.

48 (1902) 4 F 739.

trustee in sequestration and the clients for the balance of the sale price. The Lord Ordinary, Lord Kyllachy, held that the bankrupt firm and the trustee in sequestration were both disabled from taking the benefit of the solicitor's breach of trust. His reasoning was that there was a constructive trust. He stated:49

For it being once conceded that as between a law-agent and his client there is a fiduciary relation, the result of what took place here was in law really this: The bankrupts being bound under their trust to complete their clients' security by recording the bonds, must be held in law to have taken and recorded the subsequent absolute disposition primarily for their clients, and only in reversion for themselves. In short they must be held to have done in the matter what it was their duty to do. In that view, the absolute disposition was at the date of their sequestration held primarily in trust for the two competing claimants.

The First Division upheld his judgment. The Lord President (Kinross), with whom Lord McLaren concurred, adopted the Lord Ordinary's reasoning: the solicitor was guilty of a fraudulent breach of trust and the trustee in sequestration was in no better position; accordingly the absolute disposition was held on trust primarily for the clients. Lord Kinnear also agreed with the judgment of the Lord Ordinary but relied on the principle that the creditors of the bankrupt and thus the trustee in sequestration could not take advantage of his fraud.

*Jopp v Johnston's Trustee*50 is perhaps the best known of these cases. A solicitor who had been granted a factory and commission, sold shares on behalf of his client and deposited the proceeds in his personal account. The funds were mixed with his private money in the bank account. He later withdrew funds and placed them on deposit receipt. Later he died insolvent. The Second Division treated the deceased solicitor as having been in the position of a trustee in relation to his client's funds, which did not form part of his sequestrated estate. The client was therefore able to follow the funds into the deposit receipts and recover the sums that remained on deposit.

In *Newton's Executrix v Meiklejohn's Judicial Factor*51 a stockbroker, who had purchased shares on behalf of his client pledged those and other shares to a bank under a general letter of hypothecation in security for advances

49 *Colquhoun's Trustee* (n 48) at 742.

50 (1904) 6 F 1028.

51 1959 *SLT* 71.

which he received. After his death a judicial factor was appointed under s 163 of the Bankruptcy (Scotland) Act 1913. Lord Guest held that the client's executrix was entitled to a preferred ranking on the sale proceeds in the insolvency.52

In *Southern Cross Commodities Property Ltd v Martin*53 Lord Milligan held that the pursuers were entitled to a declaration that a heritable property, which had been purchased with the pursuers' funds which two of its directors had misappropriated and whose title was in the name of another company under the directors' control, was held on a constructive trust. It is true, as Professor Gretton has argued,54 that the court was concerned solely with the obligational issue of the transfer of the property to the pursuer company and not any claim against the unsecured creditors of the title-holding company which was not insolvent. But both counsel and the judge proceeded on the basis that the directors' fiduciary position and their breach of fiduciary duty could make the title holding company, which was their creature, a constructive trustee.

In *Sutman International Inc v Herbage*55 the directors of a company, who were a husband and wife, misappropriated funds of their company and invested them in heritable property. The husband became insolvent and his estates were sequestrated. The company and its liquidator sought a declarator against the couple and the husband's trustee in sequestration that the company was the true beneficial owner of the property. Lord Cullen held that the directors had misappropriated the company's funds and that made the declaration.

In those cases the Scottish courts have recognised an institutional constructive trust, as I have described it, in contexts where persons who were under fiduciary obligations, held property of their clients or company.

In *Ted Jacob Engineering Group Inc v RMJM*56 Lord Drummond Young, in a careful judgment which focused on comparative law, explained the different approaches of Scots law and English law to the law of trusts and highlighted their functional equivalence. He discussed remedies for breach

52 He referred to Bell, *Comm* I, 286 (in which Bell relied on English authorities for the principle that where a factor, who was entrusted with his principal's funds for investment, misapplied them, the produce of his misapplication, if distinguishable, remained the principal's), *Macadam* (n 47) and *Jopp* (n 50).

53 1991 *SLT* 83. Dr Parker Hood commented on the case in 1994 *SLT (News)* 265-68.

54 Gretton (n 40) 296-97.

55 Unreported, 2 August 1991; summarised 1991 GWD 30-1772.

56 2014 SC 579.

of trust and also for breach of fiduciary duty in an agency relationship and concluded that the constructive trust undoubtedly exists in Scots law.57 He suggested that a constructive trust might be a form of remedy which the courts could refuse if it would produce an unfair result. I have some difficulty with this suggestion, because in principle it should not be a matter of discretion whether a trust exists. But I am not at all attracted by a more generalised notion of a remedial constructive trust, which Lord Neuberger in a recent lecture suggested "displays equity at its flexible flabby worst."58 If the courts were able retrospectively to impose a trust as a remedy, this would come at a high price to the predictability of our law of insolvency, which is of central importance to our commercial law and to people who do business in Scotland.59

In Scots law the institutional constructive trust exists in the context of a fiduciary relationship which most commonly is agency. But it also clear that not every aspect of the relationship between a principal and an agent involves fiduciary obligations. In particular, parties can enter into contracts within an agency relationship which do not give rise to fiduciary obligations. Thus in *Style Financial Services Ltd v Bank of Scotland (No 2)*60 Style collected and held funds for the retailer, Goldberg. Style were Goldberg's agents but Lord Gill, on analysis of the contractual documents, held that they had a debtor/creditor relationship with Goldberg in relation to the funds.61

Many commercial arrangements in which one person holds the property of another do not involve any fiduciary relationship. In *Raymond Harrison & Co's Trustee v North West Securities Ltd*62 a hirer sold the property of the lessor without its authority and in breach of the leasing agreement. The lessor sought to claim the sale proceeds in the hirer's insolvency, arguing that they were held on a constructive trust. But Lord Clyde held that the contract

57 *Ted Jacob Engineering* (n 56) at para 99.

58 Lord Neuberger, "The Remedial Constructive Trust – Fact or Fiction," The Banking Services and Finance Law Association Conference, Queenstown, New Zealand, 10 August 2014.

59 If a remedial constructive trust were not to protect against a defender's insolvency, it would add nothing to a restitutionary claim based on either the principle of no profit from fraud or breach of fiduciary duty or unjustified enrichment.

60 1996 *SLT* 851.

61 See also *NZ Netherlands Society "Oranje" Inc v Keys* [1973] 1 WLR 1126, Lord Wilberforce at 1130-31 and *Walker v Corboy* (1990) 19 NSWLR 382 which were discussed in *Style* (n 60).

62 1989 *SLT* 718.

of hire did not give rise to a fiduciary relationship which might ground a constructive trust over the leased cattle or the proceeds of their sale.

#### (3) The constructive trust in Scots law

Where does all this lead? It is clear that in Scots law an institutional constructive trust does not arise in the transfer of property, whether or not registration is needed to complete the transfer. The institutional constructive trust arises from a fiduciary relationship. It is important, in order to maintain coherence in Scots law to confine fiduciary obligations to relationships where they are appropriate; and that is where the agent owes the principal a duty of loyalty giving rise to the three principles which I have quoted above from *Bristol and West Building Society v Mothew*. There is, as I have said, no general rule in Scots law that equity treats as done what is covenanted to be done. *Mansfield v Walker's Trustees* has long been authority for the absence of that rule of equity in Scots law in relation to the transfer of property. But the rule is relevant to the law of trusts and, I would suggest, in the analogous obligations of a fiduciary.

Looking at the three categories or circumstances that the court discussed in *FHR*, it seems to me that Scots law can readily recognise that where an agent in a fiduciary context makes a profit from the use of his principal's property, the fruits of that use are held on trust for the principal. That is consistent with what Bell suggested in Commentaries I. 286 and the cases which I have cited since *Macadam v Martin's Trustee*. The second category – where the agent diverts an emerging business opportunity from his principal – has long been treated in English law as giving rise to a proprietary claim. From the viewpoint of Scots property law, there is nothing proprietary about such a claim. But if it is an incident of the duty of loyalty which a fiduciary owes that the law treats as done what ought to have been done, then there may be scope in an appropriate case to hold that the opportunity is held on trust for the principal and thus does not fall within the agent's insolvency.63 The claim which is the least obviously "proprietary" is the claim for a secret commission or bribe. That is why there has been such an extensive academic debate in England,64 to which

63 This would apply event where the principal could not benefit from the opportunity (n 20).

64 The battle lines appear to be between equity lawyers on the one hand and restitution and commercial lawyers on the other.

the Court of Appeal and the Supreme Court referred in *FHR*. Again, in Scots law, a property law analysis would lead one to reject the claim. But the result which English law has arrived at could be justified in Scots law if – as in *FHR* – the court were to treat the obligation of undivided loyalty as requiring the fiduciary to disgorge his profit to his principal and the equitable principle as treating that disgorgement as having occurred.

It will be for the courts to decide in a future case whether or not Scots law recognises the existence of a constructive trust in the second and third circumstances discussed in *FHR*. On the one hand there are policy arguments that the parity in ranking of unsecured creditors should prevail: the principal is such a creditor, unless the law creates a constructive trust. On the other hand there are considerations of commercial policy which point towards the incidents of agency being similar within the United Kingdom economy. Scots law is a mixed legal system that can adapt to such policy considerations and can, as I have argued, make exceptions within a clear conceptual framework. But if the latter policy were to find favour, the coherence of Scots law would be greatly assisted if (i) both the equitable principle of treating as done what ought to have been done and the constructive trust are strictly confined to circumstances in which fiduciary duties are owed, (ii) such duties arise only where a person is acting on behalf of another in a relationship of trust and confidence and (iii) the courts are astute not to invent such a relationship where it does not exist.

# 7. The Offside Goals Rule and Fraud on Creditors

*Dr John MacLeod*

I understand that, as a student, Professor Rennie was known to miss the occasional conveyancing class in order to play football. This siren call is not the only danger that the beautiful game has posed for Scots property law. It also gave us a name, and a dubious metaphor, for the so-called offside goals rule.

Few areas of Scots property law have attracted as much modern scholarly interest.1 One of the reasons why the rule might appear unworthy of the fuss is the simplicity with which the core case may be stated. The classic instance is double sale: Alfred concludes a contract for the sale of his field to Betty; before Betty has obtained her real right, Alfred sells it a second time to Cecil, who registers first. The offside goals rule says that, if Cecil was in bad faith, the transfer to him is voidable at Betty's instance. Betty can also set aside a gratuitous transfer to Cecil even if he is in good faith.

1 D Carey Miller, "A Centenary Offering: The Double Sale Dilemma – Time to be Laid to Rest" in M Kidd and S Hoctor (eds), *Stella Iuris: Celebrating 100 years of the teaching of law in Pietermaritzburg* (2010) 96; R G Anderson, *Assignation* (2008) paras 11-04-30; D L Carey Miller with D Miller. *Corporeal Moveables in Scots Law*, 2nd edn (2005) paras 8.28-32; D A Brand, A J M Steven and S Wortley, *Professor McDonald's Conveyancing Manual*, 7th edn (2004) paras 32.52-62; S Wortley, "Double Sales and the Offside Trap: Some Thoughts on the Rule Penalising Private Knowledge of a Prior Right" 2002 JR 291; K G C Reid, *The Law of Property in Scotland* (1996) paras 695-700. Professor Rennie has perhaps been a little sceptical about the attention lavished on it, observing that "the rule against offside goals has become quite fashionable recently." R Rennie "Land Registration and the Decline of Property Law" (2010) 14 *Edin LR* 62 at 74.

There is broad consensus on the basic elements. A grant is voidable under the offside goals rule if:

If the rule can be briefly stated and there is agreement about its content, why are Scots property lawyers so concerned about it? One reason is that it bears on the discussion of the relationship between real and personal rights which was at the centre of Scots property law discourse at the turn of the 21st century. In particular, it threatens to undermine the clear distinction between real and personal rights established in *Burnett's Trustee v Grainger*. 3 The rule appears to run contrary to the maxim *prior tempore potior iure est*. 4 The puzzle is to explain how a party with a real right can be vulnerable to a challenge brought by someone with a mere personal right.

# A. *Mala Fides*, Personal Bar and the Publicity Principle

Although the topic was addressed during the foundational period in the seventeenth and eighteenth centuries,5 modern discussion begins with *Rodger (Builders) Ltd v Fawdry*6 which offers little consideration of the basis of the rule. Lord Jamieson, giving the leading judgment, was content to rely on three nineteenth-century cases where the rule had been applied and to observe that the purchaser was in bad faith.7

In the first of these, *Marshall v Hynd*, 8 the judges' primary concern was the level of knowledge needed to put the second purchaser in bad faith.

2 Reid *Property* para 695, approved in *Advice Centre for Mortgages v McNicoll* 2006 *SLT* 591 at para 46.

3 2004 SC (HL) 19. For a summary of this debate, see the Scottish Law Commission *Report on Sharp v Thomson* (SLC No 208, December 2007) Part 1.

4 For a very forceful statement of this view, see Anderson *Assignation* paras 11-05 and 11-30.

5 Anderson *Assignation* paras 11-06-23.

6 1950 SC 483.

7 1950 SC 483 at 500, citing *Marshall v Hynd* (1828) 6 S 384, *Petrie v Forsyth* (1874) 2 R 214 and *Stodart v Dalzell* (1876) 4 R 236.

8 (1828) 6 S 384.

If knowledge is to constitute bad faith, there must be some rule which explains why the party with the knowledge should have acted differently. This issue was addressed in the third case mentioned in *Rodger (Builders)*, *Stodart v Dalzell*, where Lords Ormidale and Gifford suggested that the second purchaser's knowledge of the prior right meant that he was not entitled to rely on the faith of the records regarding his seller's right.9

These authorities make Lord Gifford's characterisation of the rule as a species of personal bar in the second of the three cases, *Petrie v Forsyth*, understandable.10 On this model the first buyer has acquired a right, albeit not one which has been published. Under normal circumstances, that right could not be invoked against second buyer who had registered because the latter could invoke the faith of the records. However, the second buyer's knowledge of the right means that he is barred from making this argument since he knew better. As Reid and Blackie point out, however, personal bar is difficult to maintain in this context because of the absence of inconsistent conduct by the second buyer.11

Even if the language of personal bar is eschewed, a rule which restricts reliance on the register to those who are in good faith is conceivable. Indeed such rules exist in the Land Registration (Scotland) Act 2012.12 Wortley makes tentative moves towards such an analysis with his suggestion that the basis of the offside goals rule might lie in an aspect of the publicity principle: "the publicity principle is not merely there to protect third parties: in certain circumstances, it can also be used to penalise them."13

The difficulty with this approach is that the act of publicity (be it registration, intimation or delivery) is not merely a mechanism for making a transfer known. It is constitutive of the transfer. Until that act is completed, ownership remains with the seller and the first buyer's right is merely personal. The first buyer has no proprietary interest of which third parties could have notice. This stands in contrast to the good faith requirements

9 (1876) 4 R 236 both at 242. Similar comments were made by Lord Kinloch in *Morrison v Somerville* (1860) 22 D 1082 at 1089 and by Lord Jamieson in *Rodger Builders* 1950 SC 483 at 500.

10 (1874) 2 R 214 at 223.

11 E C Reid and J W G Blackie, *Personal Bar* (2006) para 2-08. See further J W G Blackie, "Good Faith and the Doctrine of Personal Bar" in ADM Forte (ed) *Good Faith in Contract and Property Law* (1999) 129 at 147-60.

12 E.g. Land Registration (Scotland) Act 2012 s 86, particularly paragraph (3)(c).

13 Wortley (n 1) at 314.

in the 2012 Act,14 which cover cases where the Land Register misstates the relevant real rights.

In that context, an argument based on the faith of the records or the publicity principle might have difficulty answering Lord Low's objection: "Assuming that they knew of the obligation, they knew also that it did not affect the lands."15 Like its correlative right, the seller's duty is personal. The second buyer might argue that his knowledge of it was irrelevant because the obligation of which he knew did not bind him. Further, arguments about publicity or personal bar offer little in the way of an explanation for why a gratuitous transferee who was ignorant of the earlier transfer should be vulnerable.16

### B. *Mala Fides* and the Transfer Agreement

Carey Miller suggests that the import of the second buyer's bad faith can be explained, not by reference to the publicity principle but by invoking the principle of separation of contract and conveyance.17 This principle recognises transfer as a distinct juridical act requiring intention on the part of transferor and transferee. Carey Miller argues that the second buyer's bad faith means he has a defective intention to acquire, which renders his right voidable.18

Carey Miller employs an unusual understanding of intention. Both seller and second buyer wish the transfer to take place and, on a conventional view of intention, that would be enough. At the time of the transfer their wills are directed to that end. The fact that they know it to be wrong does not affect this intention. A poacher has a sufficient *animus acquirendi*, although he knows that he is committing a crime.19 Further,

14 Land Registration (Scotland) Act 2012 ss 86-93.

15 *Morier v Brownlie & Watson* (1895) 23 R 67 at 74.

16 E.g. *Alexander v Lundies* (1675) Mor 940.

17 Wortley describes Carey Miller's analysis as an "abstract system approach" (Wortley (n 1) at 312), a characterisation which Carey Miller accepts ("A Centenary Offering" at 96). However, the analysis turns on the need for a real or transfer agreement. A transfer agreement might be necessary even in a system which also requires a valid *causa* for the transfer. Therefore, it seems marginally preferable to see the analysis as resting on the principle of separation.

18 Carey Miller *Corporeal Moveables* para 8.28. See also para 8.30 and Carey Miller (n 1) at 114.

19 Erskine, *Inst* 2.1.10.

the vices of consent, such as fraud and force and fear, operate for the protection of one of the parties to a transaction where his consent has been improperly obtained. What is being suggested here is something completely different: both parties give free and informed consent and it is a third party who needs the protection.

A second problem with Carey Miller's analysis is a variant of the problem with the publicity principle argument. Even if bad faith can affect intention to acquire, some explanation of why the knowledge amounts to bad faith is needed. As noted above, knowledge only constitutes bad faith when coupled with a rule explaining why the knowledge should have made you act differently.

As for the gratuity case, Carey Miller addresses this in straightforward policy terms, suggesting that the reason is simply that "a party who fails to give value should not trump a competing party with an earlier right."20 This approach has intuitive appeal. The law of transfer is primarily geared towards the needs of commerce and thus of onerous transferees. Donees are not worthy of this protection.

Once again, however, a little more seems necessary. Suppose Donna makes a written promise to David that she will convey a field to him. The next day, she concludes a contract with Betty for the sale of the same field. Foolishly, Betty pays up front. On the third day, Donna delivers the disposition to David who duly registers it. Betty clearly has a right against Donna for breach of contract but David is safe. The story would be different if Betty's missives had been concluded on Day 1 and the promise to David made on Day 2. If the basic idea behind the vulnerability of donees under the offside goals rule is that they are less worthy of protection than onerous transferees, it is difficult to see why Betty should be worse off because the promise happened to come first. To say that David has the earlier right is to fall into the error which underlies the personal bar analysis: the idea that some kind of protoproperty right is acquired before completion of the transfer of which the act of transfer merely gives notice. All David has on Day 1 is a personal right against Donna. Similarly, if the gratuity case is explained by lack of sympathy for donees, why can a promisee invoke the rule against later donee?21

20 Carey Miller *Corporeal Moveables* para 8.32.

21 E.g. *Alexander v Lundies* (1675) Mor 940.

### C. *Mala Fides* and Fraud

The difficulties with the publicity principle and the transfer agreement as bases for the offside goals rule drive analysis back to an earlier approach. The nineteenth-century cases cited in *Rodger (Builders)* marked a shift in the analysis of the rule. Up to that point, it was thought to rest on fraud.

*Seatoun v Copburnes*, 22 decided in 1549, is probably the first recorded case which can be understood in terms of the offside goals rule. Lady Seatoun sought to reduce an infeftment given to James Copburne by his father. She argued that, prior to that sasine, she and the priests and college of the Kirk of Seatoun had bought an annualrent23 of the lands from the father. Lady Seatoun alleged that infeftment on the annualrent had been completed, so she might have relied on her prior real right but she chose not to do so. Instead she suggested that "the said laird in manifest defraud of the said lady and preistis *dolose infeodavit suum filium in suis terris*, and sua, said scho [i.e. she], that that alienatioun *in dolo et fraude (ut predicitur) facta de iure erat retractanda*." In other words, she sought reduction of the infeftment on the basis that it was granted in fraud of her right to the lands.

Fraud also played a key role in the first major scholarly discussion of the offside goals rule: Stair's treatment of resolutive conditions in contracts of sale. A resolutive condition is a term which purports to make the property revert to the transferor in given circumstances. Stair's view was that such conditions had no proprietary effect. The transferee merely had an obligation to reconvey if the condition occurred. This raised the question of the effect of the obligation on third parties who obtained the property from the transferee. Although the origin of the obligation to convey differs from double sale, the end result is the same: an alienation in breach of an obligation to grant a real right to someone else.

As with *Seatoun v Copburnes*, Stair analyses the situation in terms of fraud:24

…though there may be fraud in the acquirer, which raiseth an obligation of reparation to the party damnified by that delinquence, yet that is but personal;

22 (1549) Sinclair *Practicks* n 459.

23 I.e. a subordinate real right, giving the holder a right to an annual payment from the owner of the burdened property.

24 Stair, *Inst* 1.14.5. He does go on to consider whether the 1621 Act might apply to gratuitous alienations of property subject to a resolutive condition but concludes that the law is not clear. It would later become firmly established that insolvency at the time of the grant was a prerequisite of such a challenge.

and another party acquiring *bona fide* or necessarily, and not partaking of that fraud, is *in tuto*. But certain knowledge, by intimation, citation, or the like, inducing *malam fidem*, whereby any prior disposition or assignation made to another party is certainly known, or at least interruption made in acquiring by arrestment or citation of the acquirer, such rights acquired, not being of necessity to satisfy prior engagements, are reducible *ex capite fraudis*, and the acquirer is partaker of the fraud of his author, who thereby becomes a granter of double rights; but this will not hinder legal diligence to proceed and be completed and become effectual, though the user thereof did certainly know of any inchoate or incomplete right of another.

Certain elements of the analysis are worthy of particular note: the idea that the primary wrong is done by the granter (referred to as the acquirer because of the context of a resolutive condition); that the successor is only vulnerable if the prior right is known of and that the basis of this is not his own fraud but participation in the granter's fraud. As with his general analysis of fraud,25 Stair characterises the vulnerability of a transaction affected by fraud in terms of a personal right to reparation from the wrongdoer.

# D. Is Fraud a Broad Enough Concept to Account for the Offside Goals Rule?

As Anderson and Reid show,26 the fraud analysis persisted until the nineteenth century. Indeed references to it can also be found in the later cases, existing alongside arguments based on publicity or personal bar.  Against the seller himself the transactions would be clearly reducible. But, in taking the second right in the knowledge of the first, the second disponee becomes an accomplice in the fraud, and the transactions is reducible against both alike.

25 Stair, *Inst* 1.9.9-15.

26 Reid *Property* para 695; Anderson *Assignation* 11-06-23.

27 (1860) 22 D 1082 at 1089. This analysis is reflected in the issue which the Inner House appointed to be put to the jury: "whether, in violation of a previous minute of agreement, dated 7th October 1850, No 8 of the process, the said disposition was granted fraudulently by the said George Somerville, and was taken fraudulently by the said John Craig Waddell, in the knowledge of the said previous agreement, and in defraud of the pursuer's rights under the same." (1860) 22 D 1082 at 1090.

In *Petrie v Forsyth*, Lord Neaves proceeded on the basis that the second purchaser's conduct was fraudulent.28 However, Lord Gifford took a different approach, distinguishing between fraud, *mala fides* and "mere knowledge."29 He concluded that what was needed was knowledge sufficient to put the second purchaser under a duty to contact the first. Lord Gifford clearly considered this to fall short of fraud. On such a model it is difficult to see how fraud can form the basis for the doctrine.

A similar line of reasoning is articulated by Lord Drummond Young in *Advice Centre for Mortgages*: 30

The theoretical basis for the foregoing principle is not discussed in any detail in the decided cases, perhaps because its practical application is very obvious, at least in simpler cases. The origins of the principle seem to lie in the concept of fraud in its older sense. This is not the modern sense, involving a false representation made knowingly, but rather consists of actings designed to defeat another person's legal right. Nevertheless, the law has moved away from the concept of fraud. In *Rodger* Lord Jamieson said: "[F]raud in the sense of moral delinquency does not enter into the matter. It is sufficient if the intending purchaser fails to make the inquiry which he is bound to do. If he fails he is no longer *in bona fide* but *in mala fide*." Thus implied or constructive knowledge, just as much as actual knowledge, will bring the principle into operation and render the second purchaser *in mala fide*.

The discomfort with fraud as a rationale is also evident in academic analysis: Kenneth Reid is careful to specify that "the original analysis based on 'fraud' remains correct, provided that 'fraud' is not confined to its narrow modern meaning."31 Wortley goes further, seeming to regard the second purchaser's liability in cases of mere knowledge of the prior right as being more than a fraud-based justification can support.32 Dot Reid views offside goals as part of the law of fraud, specifically of secondary fraud, but suggests that this is a survival of the older, broader view which was heavily dependent on the concept of inequality derived ultimately from scholastic thinking. This leaves the offside goals rule in the law of obligations but outside the established categories of enrichment or delict.33

28 (1874) 2 R 214 at 221.

29 Ibid at 223.

30 2006 *SLT* 591 at para 44.

31 Reid *Property* para 695.

32 Wortley (n 1) at 301.

33 D Reid "Fraud in Scots Law" (PhD Thesis, University of Edinburgh, 2012) ch 7, esp pp 243-44 and 250-51.

The doubt stems from the interaction of two developments. First, there is the sense that while Scots law took a broad view of fraud in the earlymodern period, later developments saw it narrow considerably. This process, particularly the influence of *Derry v Peek*, 34 is thought to have limited fraud to deceit.35 Secondly, there appears to be a relaxation in the level of knowledge required for offside goals in some of the dicta in the nineteenth-century cases. This broadened the scope of the rule and can appear to move it away from a category of intentional wrongdoing.

Is it possible to address these concerns and thus to continue to rely on fraud as a basis which can guide future development?

#### (1) Fraud on creditors rather than fraud as deceit

In response to the objection that the meaning of fraud has narrowed, reference may be made to a species of fraud which is recognised by the modern law but which does not involve deception: fraud on creditors. It is worthy of note that mere knowledge of what is going on is sufficient to render the debtor's counterparty a participant in the fraud in that context.

The best known example of fraud on creditors is the transfer or burdening of assets by an insolvent debtor. The classic examples are wellknown. A debtor recognises that he is irrecoverably insolvent. Knowing that his assets will be sold to pay his debts, he decides that he would rather see them go to his friends, so he gives them away. In some cases the transfer might be intended to allow the debtor continued use of the property, as where a businessman in embarrassed circumstances transfers the family home to his wife. Whatever the purpose, the result is the same: a pool of assets which was already insufficient to meet the debtor's obligations is further diminished. Creditors' interests are thus prejudiced. Both common law and statute allow for the reversal of such transfers or grants at the instance of creditors or the insolvency official. These grants are usually gratuitous but an onerous grantee who colludes with the debtor in his attempt to frustrate his creditors is also liable to have his grant reduced.36

It is clear that the basis of this rule at common law is that the transactions are fraudulent.37 This rule is very widely recognised in both the Common

34 (1889) 14 App Cas 337.

35 This development is discussed in detail in Reid "Fraud in Scots Law" ch 4 and 5.

36 J MacLeod "Fraud and Voidable Transfer: Scots Law in European Context" (PhD thesis, University of Edinburgh, 2013) ch 4 esp pp 83-92 and 113-24.

37 W W McBryde *Bankruptcy*, 2nd edn (1995) ch 12 esp paras 12-11-48; MacLeod "Fraud and Voidable Transfer" ch 4.

Law and Civilian tradition.38 In the latter it is commonly referred to as the *actio Pauliana*, a term which betrays the rule's origins in Roman law.

The debtor may have contracted the debts in good faith with the full intention of paying them. In such a case, the creditors have not been deceived into giving credit but they are nonetheless said to be defrauded. As with the offside goals rule, this provokes a degree of discomfort in the modern sources, leading McBryde to suggest that fraud in this context is anomalous and to caution against use of authorities on fraud in the general sense.39

The striking thing is that the anomalous fraud looks very similar to the offside goals rule. Both rules involve actions by a debtor which render him incapable of fulfilling his obligation and thus frustrate the creditor's hopes of recovery. As with the offside goals rule, the grantee may find himself liable either because he knew what the debtor was doing or because his grant was gratuitous. Furthermore, as with Stair's account of the offside goals situation, the primary fraud is that of the debtor while the grantee is liable as a participant in the debtor's fraud.40

Anderson notes the parallel between the offside goals rule and the *actio Pauliana*, but points to two differences: in the *actio Pauliana* having given good consideration is usually a defence and the relevant *mala fides* is knowledge of insolvency rather than knowledge of a prior right.41 However, these differences reflect a different context rather than a fundamental conceptual division. The reason that payment is usually a good defence to the *actio Pauliana* is that such payment renders the transaction neutral in its effect on the patrimony. There is no prejudice to ordinary creditors. It makes no difference to them whether the debtor has a piece of machinery worth £5,000 or £5,000 in his bank account. Both are assets which are

38 B M Goodman, "The Revocatory Action" (1934-35) 9 *Tulane Law Review* 422; A Boraine "Towards Codifying the *actio Pauliana*" (1996) *South African Mercantile Law Journal* 213; A Vaquer, "Traces of Paulian Action in Community Law" in R Schulze (ed), *New Features in Contract Law* (2007) 421; J J Forner Delaygua *La protección del crédito en Europa: La acción pauliana* (2000); P R Wood, *Law and Practice of International Finance* (University edn, 2008) 79-85; C von Bar and E Clive, *Principles, Definitions and Model Rules of European Private Law: Draft Common Frame of Reference Full Edition* (2009) Vol 5 2634ff and R J de Weijs "Towards an Objective Rule on Transaction Avoidance in Insolvencies" (2011) *International Insolvency Review*. http://dx.doi.org/10.1002/iir.196

39 McBryde *Bankruptcy* para 12-13.

40 E.g. *M'Cowan v Wright* (1853) 15 D 494 at 500 per Lord Hope. See further MacLeod "Fraud and Voidable Transfer" 82-87.

41 Anderson *Assignation* para 11-17.

available to them for the satisfaction of their rights. Things are different in the offside goals situation because what matters for the creditor is not the value of the patrimony as a whole but the presence in it of the particular asset to which he is entitled.

This line of thought leads to an explanation of why the relevant *mala fides* is knowledge of the insolvency in an *actio Pauliana* situation and knowledge of the competing right in an offside goals situation. Knowledge that someone is insolvent implies knowledge of personal rights against his patrimony: if you know someone is insolvent you know that he has creditors whom he cannot pay. Specific knowledge of the creditors' rights is not necessary because the counterparty knows enough to understand that the transaction will frustrate the creditors' hopes of recovery. Conversely, if a buyer knows that someone else has a personal right to a particular asset, the general solvency of the seller is not relevant. Even if the seller is generally solvent, the competitor will still be frustrated.

The *actio Pauliana* and the offside goals rule can both be seen as protecting creditors whose debtors act to frustrate their hopes of satisfaction, the difference in the detail of the two rules results from differences in context and thus in the nature of the protection necessary.

Insolvency fraud is not the only instance of fraud on creditors recognised by Scots law, although the other instance is less obvious at first sight. A creditor who intends to do diligence can use an inhibition to render the debtor's heritable property litigious.42 As with the *actio Pauliana*, the concern is that the creditor's recourse (in this case by means of diligence) against the debtor's assets will be frustrated by voluntary acts of the debtor. The point is made most clearly by reference to the historic terms of letters of inhibition. Prior to their abolition,43 letters of inhibition were the means by which the Court of Session, acting in the name of king or queen sanctioned the inhibition of the debtor. The letters instructed messengers at arms to make two prohibitions. First, they were to "inhibit and discharge" the debtor, prohibiting any dealing with his property whether heritable or moveable and any act pursuant to which diligence might be done against his assets. Secondly, "all our lieges of this realm, and all others whom it

42 *Burnett's Tr v Grainger* 2004 SC (HL) 19 at para 22 per Lord Hope. Inhibition is not the only instance of litigiosity in Scots law for the others, and for more extensive discussion of inhibition, see MacLeod "Fraud and Voidable Transfer" ch 5 and 6.

43 Bankruptcy and Diligence etc (Scotland) Act 2007 s 146.

effeirs" were to be inhibited and discharged from concluding any of the prohibited transactions with the debtor. The former prohibition required to be by personal service on the debtor, the latter by proclamation at the market cross. The reason for this drastic action was also narrated in the letters: namely that the king is informed that the debtor intends to diminish his estate "in defraud and prejudice of the complainer."44

Again, the fraud in this case is not deception. The problem facing the creditor is assets leaving the debtor's patrimony meaning that there is not enough there to satisfy the former's right. Letters of inhibition are no longer issued but the new schedule of inhibition reflects the old thinking. To take the example of an inhibition by a creditor suing to enforce a debt in the Court of Session:45

…In Her Majesty's name and authority, I [name], Messenger at Arms, by virtue of [document which warrants the inhibition] inhibit you from selling, disposing of, burdening or otherwise affecting all land and heritable property in which you have an interest to the prejudice of [the inhibitor].

Again, inhibition has its own special characteristics, notably the absence of any need to prove bad faith on the part of those dealing with the debtor but that is because registration of the inhibition operates to put everyone on notice that the debtor has been so restricted.

Another speciality of inhibition illustrates the fact that inhibition operates to protect satisfaction of a personal right. A general creditor's inhibition covers the heritable property of the debtor because any of it could be subject to an adjudication for enforcement of the debt. Where, however, the creditor inhibits with a view to enforcing a personal right to a particular plot, the effect of the inhibition is restricted to that asset.46 The general state of the patrimony is irrelevant to the creditor, provided that his access to that plot is secured.

Fraud in the sense of deception and fraud on creditors may well have been part of a broader concept of fraud which has since fallen away but both survive in the modern law. Therefore, a narrowing of the concept of fraud is not a reason to doubt its appropriateness as a grounding concept for the offside goals rule.

44 Stair, *Inst* 4.l.4.

45 Diligence (Scotland) Regulations 2009 Sch 1.

46 Bankruptcy and Diligence etc (Scotland) Act 2007 ss 150(1) and 153.

#### *Mala fides without knowledge*

The second problem identified by the modern accounts relates to the knowledge requirement. *Mala fides* can be fixed even in cases where the second purchaser is unaware of the prior right, provided that he knows enough to put him on his inquiry and then fails to properly investigate. Thus the rule can apply where a naïve second purchaser honestly thought that there was no problem. That is the basis for Lord Jamieson's observation that "fraud in the sense of moral delinquency does not enter into the matter."47

The courts have been somewhat evasive about the precise circumstances which will raise the duty of inquiry and what the content of the duty is.48 This is regrettable because it makes life difficult for potential purchasers, but the basic idea is clear enough: where there is a duty of inquiry on a purchaser and he fails to make that inquiry, he cannot rely on his ignorance of a fact of which he would have known had he fulfilled the duty. You are treated as knowing what you should have known.

Lord Drummond Young was therefore correct to characterise circumstances where the duty of inquiry is neglected as cases of "implied or constructive knowledge."49 Again, this reflects analysis found in other instances of fraud on creditors: the result of publication of an inhibition is that everyone is deemed to know of it. Where there is constructive knowledge of a prior right, the grantee is deemed to have that knowledge and the analysis therefore proceeds on the basis that he does know.

Where Lord Drummond Young went astray was to conclude that this amounted to a move away from the concept of fraud. The fraud is still there: the seller knows of the prior right and sells anyway. *Mala fides* is not watered-down fraud; *mala fides* is knowing that the fraud is happening. Such a view is consistent with the standard understanding of *bona fides* in property transactions: ignorance of another's right.50

It is worth bearing in mind that the offside goals rule is not the only circumstance where failure to come up to an objective standard of reasonable inquiry can leave a naïve counterparty liable on the basis of

47 1950 SC 483 at 499.

48 See further J MacLeod and R Anderson "Offside Goals and Interfering with Play" 2009 *SLT (News)* 93 at 94-95.

49 2006 *SLT* 591 at para 44.

50 As, for instance in the Sale of Goods Act 1979 s 24 or the Land Registration etc (Scotland) Act 2012 s 86.

complicity in fraud. A solicitor's naïve trust in his client was held sufficient to render him liable as an accessory to (conventional) fraud by deception in *Frank Houlgate Investment Co Ltd v Biggart Baillie*. 51

#### *Why is the faith bad?*

If fraud is to provide a convincing rationale for the offside goals rule some explanation is needed of why the third party must take account of a personal duty owed by someone else.

It is not quite sufficient to point to the accessory nature of the liability, however. In criminal law, such an assertion suffices because criminal law duties typically bind everyone and therefore the conduct in question is wrong for both principal and accessory. The same can be said of inducing a payment by deception.52 Everyone owes everyone else a duty not to commit such fraud. So, where Alfred induces Brenda to pay him by deception using forged documents and Cecil helps to prepare the documents, knowing what they are for, both are liable. Cecil was obliged not to deceive Brenda just as much as Alfred.

In offside goals, however, the position is different. The seller's conduct is only wrong because of a particular duty that he and only he owes to the first purchaser. Until the first contract was concluded, a sale to the second purchaser was perfectly lawful. The duty not to sell flows from that contract to which the second purchaser was not a party. The second purchaser might argue that, although he knew that the seller was behaving wrongfully, this fraud arose from the personal relationship between the seller and the first buyer and was therefore none of his business.

This problem is not unique to the offside goals rule. It is also raised by fraud by insolvent debtors but it is felt more sharply in relation to offside goals, perhaps because the *actio Pauliana* is so ubiquitous, and perhaps because the requirement of insolvency is thought to keep it within reasonable bounds.

Dot Reid explains the accessory's liability by reference to the moral sense of Stair and Aquinas and the latter's broad notion of inequality.53

51 2014 *SLT* 1001. As with the offside goals rule, there is an argument that the requisite mental element here should be drawn relatively narrowly: E C Reid "'Accession to Delinquence': Frank Houlgate Investment Co Ltd (FHI) v Biggart Baillie LLP" (2013) 17 *Edin LR* 388 at 394.

52 As in *Frank Houlgate* (n 50).

53 Reid "Fraud in Scots Law" 242.

That, however, raises the question of how this moral sense might be conceptualised as a duty with legal consequences.

The rules on fraud on creditors, whether they arise in the context of offside goals, insolvency or inhibition, presuppose a limited duty of non-interference with other people's personal rights. While a personal right is only enforceable against the debtor, it is not a matter of complete indifference to third parties. They have a duty not to facilitate breaches of the relevant obligation. However, since personal rights are invisible, facilitation only renders the facilitator liable in circumstances when he knew or ought to have known of the right and that the conduct in question would breach it.

Further evidence of such a duty can be found in the delict of inducing breach of contract. The five characteristics or essential elements of that delict were set out by Lord Hodge in *Global Resources Group Ltd v Mackay*: 54

The parallels with the requirements for the offside goals rule are close but not exact.55 Some differences are not surprising given the differing origins. Nonetheless, the parallels between the two rules are striking: in the core offside goals case, the second purchaser persuades the seller to sell when the latter was already contracted to transfer the property to another; in the foundational authority on inducing breach of contract a theatre owner persuaded a singer to appear in his theatre when she was contractually bound to sing in another.56

Both rules are part of modern Scots law and both point towards recognition of an obligation to take account of other people's personal rights. Both do so on the basis of accessory liability.57 Absent an obligation

54 2009 *SLT* 104 paras 11-4. Lord Hodge drew heavily on the restatement of the law in this area in *OBG Ltd v Allan* [2008] 1 AC 1.

55 See further J MacLeod "Offside Goals and Induced Breaches of Contract" (2009) 13 *EdinLR* 278.

56 *Lumley v Gye* (1853) 2 E & B 216; 118 ER 749.

57 The basis for the distinction between inducing breach of contract and causing loss by unlawful means in *OBG v Allan* was that the former, but not the latter was concerned

not to participate in breach of a personal right, it is difficult to see how inducing breach of contract or participating in a fraud on creditors could be considered wrongful.

Of course, that answer raises its own question: if third parties owe the holder of a personal right a duty not knowingly to participate in or encourage the breach of that right, why is the third party's liability accessory? The answer lies in the trigger for the liability. Liability depends on breach by the debtor. Until the debtor defaults on his obligation, the third party is not liable. So a third party who tried, unsuccessfully, to persuade a seller to sell to another incur no liability.

A duty of non-interference sits well with the idea that personal rights are property which is owned in essentially the same way as corporeal property.58 It can then be seen as equivalent to the duties of noninterference which protect corporeal moveables or land. Of course, the content of the duty is not absolute but neither is the duty not to interfere with corporeal property: a landowner, for example, must tolerate access taken under Part 1 of the Land Reform (Scotland) Act 2003, and the law of nuisance does not give a remedy against every use of neighbouring property which has implications for the enjoyment of his own; likewise a *bona fide* possessor of a corporeal moveable belonging to another does no wrong.

Admittedly, the duty of non-interference is not the same as the duty of non-interference with corporeal property, but that is because the nature of the property being protected is different. And in any event, the level of protection against interference by third parties is not uniform between the different types of corporeal property. There is no right to roam over corporeal moveables.

#### (2) The scope of the offside goals rule

#### *Personal rights to real rights*

Traditionally, the offside goals rule was said to protect only "rights capable of being made real"59 or, more precisely, "personal rights to real rights." This

with accessory liability: paras 3-8 and 32 per Lord Hoffmann.

58 See e.g. S Ginossar *Droit réel, propriété et créance: Élaboration d'un système rationnel des droits patrimoniaux* (1960) n 22-25.

59 *Wallace v Simmers* 1960 SC 255 at 260 per Lord Guthrie.

limitation to the rule has been doubted in light of *Trade Development Bank v Warriner & Mason (Scotland) Ltd*. 60 In that case, a condition against leasing in a standard security was given effect against a tenant on the basis of the tenant's bad faith *vis-à-vis* the prohibition. This led Kenneth Reid to suggest that the personal-right-to-a-real-right requirement had fallen away and that the scope of the rule was instead controlled by the requirement that the granter was in breach of an antecedent obligation in making the grant.61

As Webster has pointed out,62 framing the rule's application in these terms is difficult to reconcile with the earlier decision of the Inner House in *Wallace v Simmers*. 63 There the court declined to apply the rule to protect a licensee against an action for ejection by a third party purchaser on the basis that this was not a personal right to a real right. Sale by one who has granted an irrevocable licence is a breach of an antecedent obligation (since it renders the licensor unable to fulfil his obligation), but *Wallace* means that the rule will not apply even if the third party is in bad faith.

The view that not every grant in breach of a prior obligation is challengeable as an offside goal is supported by recent authority.64 In *Gibson v Royal Bank of Scotland Plc*, however, Lord Emslie expressed some doubts about whether the "personal right to a real right" test was appropriately expressed.65 Nonetheless, his alternative formulation: that the right be capable of "affecting the records" seems to come to much the same thing for heritable property. The records are only affected in any meaningful way by transfer, extinction or grant of a real right.

Lord Emslie's formulation has the disadvantage of not being apposite to cover moveable property. On the other hand it usefully raises the question of the holder of a real right who is contractually bound to grant a discharge transferring that right before the discharge is granted. For instance, Dominic may own a plot which has the benefit of a right of way over Serena's land. She pays him for a discharge because she wants to develop the land. Before the discharge is granted, Dominic gifts the plot to Gary, who refuses to grant the discharge. Should Serena be able to invoke the offside goals

60 1980 SC 74, approved in *Trade Development Bank v Crittall Windows Ltd* 1983 *SLT* 510.

61 Reid *Property* paras 695-96.

62 P Webster "The Relationship of Tenant and Successor Landlord in Scots Law" (PhD thesis, University of Edinburgh, 2008) 211-13.

63 1960 SC 255.

64 *Optical Express (Gyle) Ltd v Marks & Spencer plc* 2000 *SLT* 644 and *Gibson v Royal Bank of Scotland Plc* 2009 *SLT* 444.

65 2009 *SLT* 444 at paras 43-50, esp para 44.

rule? On Lord Emslie's formulation, she can. On the traditional model, the picture is less clear but protecting her seems to be the correct result. Had Dominic contracted to grant a servitude to her, Serena would have been able to rely on it and there is no obvious reason why one type of transaction with a servitude should be favoured over another.

Therefore, the requirement might be better rephrased as a personal right to the grant, transfer, variation or discharge of a real right. This is rather cumbersome. The basic point expressed by the "personal-right-to-realright" formulation appears to be widely accepted and the phrase remains a useful (if slightly imprecise) handle for the concept. The question remains, however, of how this idea sits with the rationale for the offside goals rule presented here.

#### *Personal rights to subordinate real rights*

One implication of the suggestion that the offside goals rule protects personal rights to the grant, transfer or discharge of real rights is that the rule extends beyond double sale. Someone with a personal right to the grant of a servitude or a lease should be able to invoke the rule too.66 So, if Bert contracts to grant a right of way to Sally but transfers the property to Ernie before Sally is able to register the grant, Sally can invoke the offside goals rule against Ernie if he was in bad faith or the transfer was gratuitous.

Subordinate real rights present difficulties in terms of remedies. If, the holder of the prior personal right hears of the wrongful grant before it is completed, he may be able to obtain an interdict against completion.67 What of the case where the prior rightholder only discovers the grant after the fact? Where the first grantee was entitled to transfer of the asset, there is no difficulty in returning the property to the seller. That is only a short term step, after which it will pass to the first grantee. Where, on the other hand, the first grantee is merely entitled to a subordinate right, setting a transfer aside seems to go too far. If the first grantee is entitled to a servitude, all he needs is an opportunity to complete his real right. He has no interest in the seller being the owner instead of the second buyer.

66 There is express authority to this effect in South Africa *Grant v Stonestreet* 1968 (4) SA 1 (A). A similar result was reached in *Greig v Brown and Nicholson* (1829) 7 S 274, although the court's reasoning is not very clearly expressed.

67 *Spurway*, *Petr* (10 December 1986, unreported), OH, available on LexisNexis.

The South African solution is to allow the personal right to be enforced directly against the successor.68 This result has been explained in terms of a broad, equitable approach.69 It seems to come close to collapsing the distinction between real and personal rights and may explain the tendency in South Africa to suggest that the doctrine of notice (their equivalent of the offside goals rule) affords "limited real effect" to personal rights.70 Such an approach is not particularly attractive for Scots law. How then can the problem of the offside goal against a right to a servitude be solved?

One answer is suggested by reflecting on the fact that reduction of a deed granted in breach of inhibition is *ad hunc effectum*. Everyone also knows that reduction *ad hunc effectum* means that only the inhibitor is entitled to treat the reduced deed as null. Familiarity with the rule and lack of familiarity with Latin are apt to mask how strange this is. The words *ad hunc effectum* simply mean "to this effect." Why should those words have come to signify that the reduction only benefits the inhibitor?

To answer this question, we need to make brief mention of seventeenthcentury decisions concerning fraud on creditors by an insolvent debtor. In many of those cases, reduction was granted but the Lords specified the effect of reduction. In some cases this was to allow the reducing creditor to rank *pari passu* with other creditors;71 in others, the reduction only benefited certain classes of creditor.72 The particular scope was determined by what was necessary to reverse the prejudice caused by the debtor's fraudulent actions and the rationale is fairly clear. To go further would be to go beyond the purpose of the rule: which is to secure creditors against the debtor's attempts to frustrate their claims. The limitation was typically introduced by the phrase "to the effect that" or some variation thereon.

68 1968 (4) SA 1 at 20 per Ogilvie JA. The reasoning of the court in *Greig v Brown and Nicholson* (n 65) in Shaw's report is limited to the brief and rather surprising suggestion that since both rights were personal "the common owner is divested by the conveyance" without the need to complete the grant of servitude by taking possession. This analysis would be difficult to maintain light of the clarification of the relationship between real and personal rights and of the race to completion in *Sharp v Thomson* 1995 SC 455 and *Burnett's Trustee v Grainger* 2004 SC (HL) 19.

69 *Meridian Bay Restaurant (Pty) Ltd v Mitchell* 2011 (4) SA 1 (SCA) at paras 30-1 per Ponnan JA.

70 "Die juiste siening na my mening is dat vanweë die kennisleer aan 'n persoonlike reg beperkte saaklike werking verleen word": *Associate South African Bakeries (Pty) Ltd v Oryx & Vereinigte Bäckerien (Pty) Ltd* 1982 (3) SA 893 (A) at 910 per Van Heerden JA.

71 E.g. *Kinloch v Blair* (1678) Mor 889 and *Brown v Murray* (1754) Mor 886.

72 E.g. *Cunninghame v Hamilton* (1682) Mor 1064 and *Bateman & Chaplane v Hamilton* (1686) Mor 1076. For further discussion of these cases, see MacLeod "Fraud and Voidable Transfer" 124-26.

Turning back to inhibitions, the import of the phrase *ad hunc effectum* is readily explicable. The prohibition on dealing was imposed to protect the inhibiting creditor and no one else. Therefore, to allow the reduction to have effect in relation to anyone else would go beyond the purpose of the rule. We can surmise that there was an initial period when the words *ad hunc effectum* merely introduced the statement of the reduction's operation and that later the specification was dropped as the Latin tag became detached from its meaning.

What this shows us is that limitation of the effect of reductions is not limited to inhibitions, which raises the possibility of applying it in the third class of fraud on creditors: offside goals.

Reduction of deeds granted in fraud of creditors is about putting assets back in a patrimony so that creditors can obtain rights in them. This is obviously the case with inhibition, or fraud by an insolvent debtor, but it is also the case in a classic double sale of land. Reduction is not an end in itself. Rather, it puts the fraudulent granter in a position to perform by granting a real right affecting the asset. Alternatively, it allows the creditors to get the court to make the grant for the debtor by means of diligence. This endgame is what justifies the reduction.

Where reduction is *ad hunc effectum*, its effect is specified so it goes no further than necessary to secure the protected interest. Thus reduction *ex capite inhibitionis* merely operates to render an adjudication against the former owner competent. That being achieved, it has no further value.

In some cases, the practical distinction between *ad hunc effectum* and catholic reduction is a minor one: if a transfer to Billy is reduced to allow Dan to register his disposition, Dan's registration will deprive Billy of any right that he has. However, it makes a big difference where an offside goal has been scored and there is a personal right to a servitude. The reduction would be *ad hunc effectum* to enable a deed of servitude granted by the seller to be registered and constituted a real right, but it would go no further. For all other purposes Billy would remain owner.

Of course, the net result of this approach is very similar to the South African rule. A transferee who was faced with a valid offside goals challenge in these circumstances could save everyone a lot of time and money simply by agreeing to grant the relevant subordinate real right. In doing so, he would be in no worse a position than if reduction *ad hunc effectum* had been obtained and the grant had been made from his author. The courts might even be justified in allowing the procedure to be short-circuited and compelling the transferee to make such a grant. Nonetheless, for the sake

of a proper understanding of the relationship between real and personal rights, it is important to grasp why such a short cut might be permitted.

#### *Does the fraud-on-creditors analysis prove too much?*

The fraud-on-creditors analysis can account for one implication of the view that the offside goals rule is a mechanism for protecting personal rights to real rights rather than being restricted to the case of double sale. However, it appears to struggle with a more fundamental aspect. If the basis of the offside goals rule is fraud on creditors and some general duty not to participate in the breach of personal rights owed to others, why should it be restricted to creditors holding a particular class of personal rights? After all, any kind of creditor can challenge a fraudulent grant by an insolvent debtor or protect his right with an inhibition. Why then, should the offside goals rule be restricted to a particular class of personal right?

The first point to note is that the offside goals rule is not the only mechanism which gives external effect to personal rights. Scots law also recognises that inducing breach of contract and the personal-right-toa-real-right restriction do not apply to it. Therefore, the fact that a right is not a personal right to a real right does not necessarily mean that the third party is safe. Rather, it is likely to mean that he is liable in damages but safe from reduction of the transfer (as there is no offside goal). So the consequences of the personal-right-to-a-real-right restriction are not as sharp as first appears.

This argument depends on the mental element of inducing breach of contract being substantially the same as that for offside goals. This is broadly the case: the test for the mental element of inducing breach of contract is likely to be met in most bad-faith offside goals cases. If the second purchaser knows of the prior right, then breach of its correlative obligation is a necessary means to the end sought by the second purchaser: obtaining the property for himself.

The difficulty arises in those cases where the second purchaser is put on notice but has something which falls short of clear and certain knowledge of the prior right. This is a divergence between inducing breach of contract and offside goals. However, it is not as big a gap as may appear at first. In *OBG v Allan*, Lord Hoffmann made it clear that wilful blindness, where someone decides not to inquire for fear of what they might find, was as good as knowledge.73 That is sufficient to cover a lot of the offside goals

73 [2008] 1 AC 1 at paras 40-41.

cases and a reining in of the mental element to match that for inducing breach of contract would be desirable since the present approach creates too much uncertainty for potential purchasers.74

Even under the present law, there will be few cases where the mental element for the offside goals rule is fulfilled but that for inducing breach of contract is not. Where both are fulfilled, the restriction of the offside goals rule to personal rights to real rights affects which remedies are available rather than whether any remedy is available.

This brings the analysis back to the nature of the remedy under the offside goals rule. As suggested above, avoidance for fraud on creditors is aimed at putting an asset back in a patrimony so that a creditor can obtain a real right in it. It operates *ad hunc effectum* and goes no further. It gives the fraudulent transferor no right to possess the property.

That, in turn, provides a rationale for the result in *Wallace v Simmers*. 75 Miss Simmers had a licence (a personal right) against her brother which entitled her to occupy a house on his property. He sold the property in breach of that licence. Suppose that she had obtained a reduction of the transfer from her brother to the buyer. What would the effect of that reduction have been? Her brother had no obligation to grant her any real right and, since reduction would not have given him any right to possess the property, he would not be in a position to secure her possession and thus to fulfil his obligation under the licence. The *hunc* in *ad hunc effectum* in this case would have no content. Therefore the reduction would have been pointless.

Restricting offside goals to personal rights to the grant of real rights is therefore consistent with the fraud rationale because it reflects the nature of avoidance for fraud on creditors.

#### (3) Gratuitous acquirers

An analysis based on the wrongful nature of the second purchaser's conduct faces obvious challenges in dealing with the case of gratuitous acquisition.76 Yet recognition that the seller's conduct amounts to fraud means that the "no profit from fraud" rule and the law of unjustified enrichment can be

74 See further MacLeod and Anderson "Offside Goals and Interfering with Play" at 94-95 and MacLeod "Offside Goals and Induced Breaches of Contract" 278 at 281-82.

75 1960 SC 255.

76 For examples of an offside goals challenge by a gratuitous acquirer, see *Alexander v Lundies* (1675) Mor 940 and *Anderson v Lows* (1863) 2 M 100.

invoked to explain the vulnerability.77 This rule presents its own challenges because of the indirect nature of the enrichment. However, this exception to the normal rule against recovering indirect enrichment can be explained as an extension of the fraud rule: had the donee known what was being done, he would have been bound to refuse the property. That being the case, it might be argued that he would act wrongfully in seeking to hold onto the property when he finds out the facts.78 The voidability of the grant enables the party who would be so-wronged to prevent this wrong from being done. Therefore, an obligation to reverse the enrichment is justified although the enrichment is indirect.

Of course, an onerous transferee in good faith may also discover later that he was an unwitting accomplice in the seller's wrong, but in such a case the balance of policy is a little different.  Were it to be forfeited, he would be left with a claim for money and so exposed to the risk of the seller's insolvency. Given the personal rights do not rank according to the rule *prior tempore potior iure*, there is no obvious reason why that burden should be shifted from the first buyer to the second when both were duped by the seller.

This analysis draws on the point made by Carey Miller regarding the relative lack of favour which the law shows to donees, but it gives a reason for allowing a donee whose personal right predates a right under an onerous contract to keep the property if he got his real right first. In that case, the donee was not an unwitting accomplice in any fraud because his author was perfectly entitled to make the promise at the time when he made it.

### E. Implications of Fraud on Creditors as a Rationale

On the analysis suggested above, avoidance of the transfer gives effect to the first creditor's delictual right to reparation against a second purchaser who acquired in bad faith. It does that by putting the second purchaser in the position he would have been in had the wrongful act not taken place. The voidability of gratuitous grants is based on an analogous rule in the

77 Reid "Fraud in Scots Law" 243-49 and 256-58.

78 This idea of "incomplete *dolus*" which is completed at the time of enforcement has been deployed in the context of innocent misrepresentation: MacLeod "Fraud and Voidable Transfer" 48-50.

law of enrichment, which can be viewed as an extension of the fraud rule. One advantage of this view is that it allows the offside goals rule to be set alongside the other instances of fraud on creditors. Once that is established, they can offer guidance on some of the contested issues surrounding the offside goals rule.

The implications for the relationship between offside goals and subordinate real rights have already been discussed but the fraud-oncreditors analysis also casts light on another point of contention: the time at which the grantee must be put in bad faith for the offside goals rule to apply. It was suggested *obiter* in *Rodger (Builders)* that a buyer who was in good faith when missives were concluded but who discovered the prior right before registration of the disposition would be vulnerable.79 This view was followed by Lord Eassie in *Alex Brewster & Sons v Caughey*, 80 whose decision was, in turn, endorsed by Lord Rodger in *Burnett's Trustee v Grainger*. 81 Lord Rodger took pains to explain why the position of the trustee in sequestration was distinguishable from that of a second buyer in an offside goals case. That was necessary because of his view that a second buyer who hears of a prior right must stand aside for the first purchaser whereas there is no such obligation on the trustee.

Despite its high authority this seems to be wrong in principle and has rightly been subject to academic criticism.82 A clue as to why it is wrong can be found in the extract from Stair which Lord Rodger gave to distinguish between the position of the trustee or the creditor doing diligence and the second purchaser:

But certain knowledge, by intimation, citation, or the like, inducing *malam fidem*, whereby any prior disposition or assignation made to another party is certainly known, or at least interruption made in acquiring by arrestment or citation of the acquirer, such rights acquired, not being of necessity to satisfy prior engagements, are reducible *ex capite fraudis*, and the acquirer is partaker of the fraud of his author, who thereby becomes a granter of double rights.83

While the general rule is that a bad faith acquirer will be vulnerable as a partaker in his author's fraud, the rule does not apply to those who

79 1950 SC 483 at 500 per Lord Jamieson.

80 Unreported, 2 May 2002. Available at http://www.scotcourts.gov.uk/opinions/EAS0904. html

81 2004 SC (HL) 19 at para 142.

82 Anderson *Assignaton* paras 11-24-31.

83 Stair, *Inst* 1.14.5, cited 2004 SC (HL) 19 para 142.

acquire "of necessity to satisfy prior engagements." As Lord Rodger rightly observed, the trustee in sequestration and creditors doing diligence may readily be considered to fall into this class.

However, Lord Rodger neglects the fact that, once a purchaser has concluded his contract with the seller, he too is a creditor84 and takes "of necessity" because, like other creditors, taking an asset is the only way that he can ensure that his right is fulfilled. Indeed, it might be argued that the necessity affecting a purchaser is more pressing than that affecting a creditor who is owed money. It makes no difference to the latter which of the debtor's assets is sold provided that it raises sufficient funds to pay the debt. A purchaser's right, on the other hand, can only be satisfied by transfer of the asset he contracted to buy.

The point becomes clearer after reflection on other cases for fraud on creditors in the context of insolvency and of inhibition. It is no fraud to accept what you are owed and that is all that a buyer who registers with supervening knowledge of a prior contract does. There is an unavoidable conflict of rights and, in such a situation, each person is entitled to look to his own interests. The purchaser who knows of the prior contract before he concludes his own contract is in a different position because he can avoid the conflict of rights by not agreeing to buy the property.

#### F. Summary

The analysis in this chapter has suggested that the offside goals rule is best understood as an instance of the law's response to fraud on creditors. Avoidance is natural restitution, giving the defrauded creditor reparation for the wrong. Like the other instances of fraud on creditors, grantees may be liable as participants in the fraud (where they are in bad faith) or on the basis of an enrichment rule which prevents the completion of an incomplete *dolus* (where the grant is gratuitous).

Categorisation of the rule as an instance of fraud on creditors suggests that avoidance on the basis of the offside goals rule is *ad hunc effectum*, with the scope of the reversal being defined by what is necessary to allow the defrauded creditor satisfaction by obtaining a real right in the relevant property. This factor explains both how the offside goals rule can protect

84 R G Anderson "Fraud and Transfer on Insolvency: ta … ta… *tantum et tale*" (2004) 11 *Edin LR* 187 at 202.

a personal right to a subordinate real right and why the rule is limited to personal rights to real rights. The fraud-on-creditors rationale also implies that a creditor who was in good faith when he acquired his personal right is entitled to pursue satisfaction of that right even if he discovers a conflicting personal right before he gets his real right.

Painful though it is for an academic to admit it, skipping those conveyancing classes does not appear to have done any harm to Professor Rennie's grasp of Scots property law. The Scots lawyer can handle a little football and, it appears, Scots law can handle the offside goals rule too.

# 8. A New Era in Conveyancing: Advance Notices and the Land Registration etc. (Scotland) Act 2012

*Ann Stewart*

For decades, property lawyers in jurisdictions other than Scotland expressed astonishment that Scottish solicitors effectively underwrote their seller client's obligation to a purchaser to provide, after settlement, records in the property and personal registers that would be clear of any entry, deed, decree or diligence, which was either prejudicial to the validity of, or was an encumbrance on, the seller's title to the property. Solicitors did this by granting to the purchaser, by way of formal letter to the purchaser's solicitor, a firm's undertaking either that the records would be clear, or to clear them if they were not. The "letter of obligation," the document by which this apparently reckless practice was effected, was an invariable feature of the Scottish conveyancing landscape.

But that has all now changed. The Land Registration etc. (Scotland) Act 2012 introduced a new concept to Scottish conveyancing – the advance notice procedure – which has transformed the way in which property transactions are conducted, and in the vast majority of cases has eliminated the requirement for any letter of obligation.

# A. Letters of Obligation

#### (1) Historical background

The origin of the practice of granting a letter of obligation at settlement may be said to be lost in the mists of time. As early as 1900 James Sturrock,1 in an annotation to a lecture by Professor Allan Menzies on searches in conveyancing transactions, refers to a case in 18962 in which Mr Gordon, the law agent, sold the property "and granted the usual obligation to produce a search showing a clear record." Although in that case, the law agents themselves had had an interest in the property and signed the disposition as consenters, the fact that, four years later, Sturrock describes the granting of a letter of obligation as "usual" indicates that this was already standard practice. This is in spite of the fact that there is no legal obligation on a seller's solicitor to give a letter of obligation.

Is it necessary to delve back further to identify the origins of this practice? Arguably, over a century of practice must be compelling enough evidence that this was firmly embedded in Scottish conveyancing tradition. Later conveyancing manuals allude to this practice as being "general and almost universal"3 and "usual practice."4

#### (2) What is the function of a letter of obligation?

Until recently, the letter of obligation was a "little understood, but vital, part of any transaction."5 There is an intrinsic weakness in the conveyancing process, for which the letter of obligation was the plaster cast. The weakness arises because of a hiatus in the succession of steps in the conveyancing process around settlement.6

1 J S Sturrock, *Conveyancing According to the Law of Scotland* (1900) 935, based on the Lectures of Allan Menzies, Professor of Conveyancing at the University of Edinburgh between 1847 and 1856.

2 *Dryburgh v Gordon* [1896] 24 R 1.

3 J Burns, *Conveyancing Practice According to the Law of Scotland*, 4th edn (1957) 302.

4 J M Halliday, *Conveyancing Law and Practice in Scotland*, 2nd edn (1997) 515.

5 J H Sinclair and E Sinclair, *Handbook of Conveyancing Practice in Scotland*, 5th edn (2006) 181.

6 "Settlement" is the term used for the steps that take place on the date of entry when the price is paid by, and the disposition is delivered to, the purchaser and (usually) entry is taken by him. In commercial property transactions this is often referred to as "completion."

#### *The "gap" period*

A seller is required to exhibit clear searches in the property and personal registers before settlement of the purchase takes place. The existence of any adverse deed, or an inhibition against the seller that predates the missives, will be disclosed in such searches, and usually steps have to be taken to discharge such entries before the purchaser will proceed to completion and pay the price. Those searches must be ordered up and exhibited to the purchaser's solicitors as close as possible to the date of entry, but before settlement takes place. Such searches can only disclose the state of play of the registers at a date that pre-dates settlement. The date to which the searches are certified may also pre-date the date of settlement, perhaps by two or more days. So there is a gap between the date to which the Registers have been searched, and the date on which the purchaser hands over the price.

There is another, consecutive gap that occurs between settlement and the date on which the purchaser registers his title and obtains a real right to the property. While it is possible, immediately following completion of the transaction, to take the delivered deed to the Land Register and present it in person (and this does happen reasonably frequently), in the majority of cases, following completion there is a delay, perhaps only of a day or two, while the post completion formalities are dealt with, any stamp duty land tax7 paid, and registration forms completed, before the disposition in favour of the purchaser arrives at the Registers and is entered onto the records. Professional practice guidance permits a period of up to fourteen days after settlement within which to present the purchaser's application for registration.8 Solicitors whose offices are not located in Glasgow or Edinburgh usually have no choice but to submit applications by post or through legal document exchange arrangements, or resort to the expense of a courier.

During this gap, or invisibility period, there are risks. A competing deed could be presented for registration before the purchaser's disposition is presented. Until comparatively recently, the possibility of the seller being sequestrated or going into liquidation or administration during the

7 To be replaced in Scotland on 1 April 2015, by land and buildings transaction tax.

8 Law Society of Scotland, Rules and Guidance, Section F, Division C – Letters of obligation and advance notices, para 3, available at http://www.lawscot.org.uk/ rules-and-guidance/section-f-guidance-relating-to-particular-types-of-work/ division-c-conveyancing/guidance/letters-of-obligation-and-advance-notices/

gap period also posed a serious risk. To provide protection against the occurrence of these risks – particularly insolvency or the emergence of a rival deed – the letter of obligation historically stepped into the breach.

#### *The guarantee of clear records*

It is unusual for a solicitor to bind himself personally, and thus be liable to incur personal liability, in respect of the obligations of his client. Generally when conducting a transaction, it will be beyond any doubt that the solicitor is acting as the agent for a disclosed principal. Missives are entered into by solicitors "for and on behalf of our client." The letter of obligation was a clear exception to this general rule.

The letter of obligation was, in effect, a guarantee that the registers would be clear of any competing deeds or decrees and diligences affecting the seller. Although the styles of wording used varied slightly depending on whether the transaction involved recording in the General Register of Sasines (now unlikely, since all transfers of property9 will induce a first registration in the Land Register, where the seller's title is in the Sasine Register), or in the Land Register, the effect was the same: if any deed, decree or diligence appeared on the records that would prejudice the purchaser's title, then provided these had not been created by or against the purchaser, the firm was obliged to remove them. The firm's exposure under a typical letter of obligation was a maximum of fourteen days, or until the purchaser's deed was registered, if earlier.

#### *The undertaking*

The undertaking given in a typical letter of obligation (for a sale of registered property) would say:

With reference to the settlement of this transaction today, we undertake to clear the records of any deed, decree or diligence (other than such as may be created by, or against, the Purchaser) which may be recorded in the Personal Registers or to which effect may be given in the Land Register in the period from [date of certification of Form 12 or 13 Report (search)] to fourteen days after today's date inclusive (or to the earlier date of registration of the

9 Following the introduction of the 2012 Act on 8 December 2014, all conveyances, whether for valuable consideration or not, induce a first registration in the Land Register, if the title to the property is still in the Sasine Register.

Purchaser's interest in the Property) and which would cause the Keeper10 to make an entry on, or qualify her indemnity in, [the Title Sheet to be updated] [the Land Certificate to be issued] in respect of that interest.

#### (3) Minimising risk to the seller's solicitor

#### *Professional indemnity insurance*

That the solution to the gap period, and the underwriting of these risks, was taken on by the solicitor profession in Scotland (which appears to be the only jurisdiction in which such a mechanism was used) seems, on the face of it, perverse. If there is a risk associated with a process, then the obvious solution is to arrange insurance to protect against that risk. In fact, title indemnity insurance cover was available in situations where no letter of obligation was to be granted, although it was not routinely obtained.

However, insurance cover was and remains available, albeit indirectly, for the gap period risks. It takes the form of the professional indemnity insurance that all firms of solicitors have to take out to be able to practice. The Master Policy is arranged by the Law Society of Scotland, to provide indemnity for solicitors against a variety of types of professional liability, arising out of business which is customarily carried on or transacted by solicitors in Scotland. This includes claims arising out of letters of obligation. Solicitors make a contribution annually to the Law Society for the cost of this insurance which sets a mandatory limit of indemnity, currently £2 million, for each firm. Individual firms can, and do, arrange their own top-up cover for protection in the case of claims of higher amounts. Since letters of obligation were given in commercial property transactions involving tens or hundreds of millions of pounds, such top-up cover was essential for firms with a commercial property practice.

Professional indemnity insurance cover was and remains available for a letter of obligation or other undertaking by the firm in any circumstances. However the letter of obligation was given a benign treatment under Special Conditions that apply to the Master Policy if it is "classic."11

10 The Keeper of the Registers of Scotland.

11 That "benign" treatment continues beyond 8 December 2014, at least for the PI insurance year 2014/2015. Whether it will continue beyond November 2015 is up to the insurers.

### *The classic letter of obligation*

The wording of the classic letter of obligation had to contain the components of the style wording above, including the fourteen day time limit, although there was no mandatory style. Before granting the letter of obligation, the seller's solicitor had to comply with certain conditions, designed to ensure that any risk of a claim was minimised.

The conditions were:

Provided these conditions were complied with for a letter of obligation, then even in the case of a claim which had to be met from professional indemnity insurance, the excess that the firm in question was required to pay in the event of any claim (the "self-insured amount") was nil, and there was no adverse impact on any premium loading or discount for that firm. If a letter of obligation was given in classic terms, but the conditions had not been complied with (known as a "failed classic"), then the normal self-insured amount applied. Obligations which fell outside the "classic"

12 Law Society of Scotland, Rules and Guidance, Section F, Division C – Letters of obligation, para 4, available at http://www.lawscot.org.uk/rules-and-guidance/sectionf-guidance-relating-to-particular-types-of-work/division-c-conveyancing/guidance/ letters-of-obligation-and-advance-notices/

13 Available at http://www.cml.org.uk/cml/handbook/scotland. No changes have been made to the CML Handbook to reflect any changes in practice relating to the coming into force of the provisions of the Land Registration (Scotland) Act 2012, although individual lenders are left to make whatever arrangements they consider are required.

obligations to clear the records or deliver an executed discharge (known as "non-classic") resulted in the application of a double excess if a claim was made and met14 as well being taken into account for any discount or loading to Master Policy premiums for the firm in question.15

#### *An unpopular arrangement*

It probably goes almost without saying that the letter of obligation was extremely unpopular with solicitors in Scotland, but it had for many years been an unavoidable evil, due in large part to the effect of professional custom and tradition, and it is a not an understatement to say that, without the letter of obligation as an integral part of the settlement procedure, the conveyancing process as we knew it would have collapsed.

While, as already noted, a solicitor had no legal obligation to grant a letter of obligation, Law Society guidance had moved from the position held several decades ago that no letter of obligation had to be given unless the missives expressly provide for it, to the recent view of the Conveyancing Committee of the Law Society that "conveyancing transactions should be settled with a letter of obligation being granted by the solicitor personally" and "[w]hile there is no legal obligation to give a letter of obligation where missives are silent, there is a professional duty on a solicitor to grant a letter of obligation unless the solicitor advises to the contrary at the earliest possible opportunity."16

In recent years there had been increasing unwillingness on the part of solicitors to grant letters of obligation in certain circumstances. In transactions where the solicitor acted for an insolvency practitioner in a sale, for example, the practice had evolved of flatly refusing to give any letter of obligation. This was in part due to the refusal by insolvency practitioners to accept any personal liability. The letter of obligation was equally unpopular with insurers, and this was exacerbated in the late 1980s and early 1990s by the increased incidence of second standard securities over residential properties which were granted unknowingly by home owners. These securities were usually granted at the time of making home improvements, such as installation of double glazing

14 Known as a "double deductible."

15 But see n 11

16 Law Society of Scotland, Rules and Guidance, Section F, Division C – Letters of obligation.

or replacement kitchens, with the owner being under the impression that they were being asked to sign some credit agreement, unaware that the "agreement" would then be registered against their title. The preponderance of such second standard securities led to the requirement to make proper enquiry of the client as to the granting of other securities, and the prudent conveyancer would include an enquiry about carrying out any home improvements.

Against a background of increasing concern, it was clear that something would need to be done. One only needs to look at the legal systems of other countries and jurisdictions, including our closest neighbour, England, and to certain advance warning systems that were already operating in Scotland – the most obvious being the notice of letters of inhibitions procedure17 – to see the prospects of a solution in some form of priority notification procedure, linked to the registration of deeds and documents in the Registers of Scotland.

### B. The New System of Advance Notices

#### (1) The genesis of the Scottish Advance Notice

The Scottish Law Commission, always innovative in bringing forward new approaches to old problems, had already decided to include the thorny topic of land registration reform in its Sixth Programme of Law Reform,18 at the request of the Keeper of the Registers of Scotland. There then followed a series of Discussion Papers19 on a wide range of aspects of land registration, which had been introduced in Scotland by the Land Registration (Scotland) Act 1979. The third of these Discussion Papers, which dealt with a miscellaneous collection of issues, first flagged the prospect of a priority notice scheme.20

That early consideration of how a priority notice procedure in Scotland could work drew from a number of other jurisdictions for inspiration, both selecting and rejecting elements of other systems to consider how best to

17 Introduced by the Titles to Land Consolidation (Scotland) Act 1868, s155.

18 (Scot Law Com No 176, 2000).

19 Discussion Paper on *Land Registration: Void and Voidable Titles* (Scot Law Com DP No 125, 2004), Discussion Paper on *Land Registration: Registration, Rectification and Indemnity* (Scot Law Com DP No 128, 2005) and Discussion Paper on *Land Registration: Miscellaneous Issues* (Scot Law Com DP No 130, 2005).

20 DP on *LR: Miscellaneous Issues* (n 19) part 7.

tailor the system for Scotland. The DP identified the key advantages of a scheme of advance notices.21 Uppermost is the certainty of success against the threat of a competing title (or the comfort that there are no competing titles) that a priority notice system would bring,22 coupled with the reduction of exposure to risk from letters of obligation that would follow as a consequence.23

However the DP also identified disadvantages to such a system, citing arguments that it could be regarded as unnecessary24 – the imminent introduction of ARTL25 would enable the instantaneous signing, payment for and delivery of conveyancing documents, removing the risk from a competing deed. It was, however, recognised in the DP that ARTL would not necessarily be suitable for all types of transaction, and might not therefore be a sufficient solution.26 It has proved to be the case that, although there have been many transactions completed under ARTL, it can only cope with transactions that are a dealing of the whole of an already registered interest, and its application, since introduction, has been largely confined to residential transactions and remortgages.

Another criticism of a priority notice system identified in the DP was that it would be disproportionate.27 The level of risk from insolvency has in any event decreased, since a trustee in sequestration is no longer able immediately to complete a title to property in the bankrupt's estate following on appointment, but must wait for a period of 28 days to elapse.28 While there may be risks attendant with the liquidation or administration of a company, the Scottish Law Commission did not consider these to be either considerable or insurmountable.

The original proposal for priority notices in the DP suggested backdating the effective date of registration of the protected deed to

21 DP on *LR: Miscellaneous Issues* (n 19) para 7.21-7.28.

22 Ibid para 7.22-7.24.

23 Ibid para 7.25-7.27.

24 Ibid para 7.29-7.30.

25 Automated Registration of Title to Land, a system by which the transfer document (disposition) is created within an electronic system, digitally signed and electronically delivered, thus eliminating the gap period. ARTL was subsequently introduced, but it is (currently) limited in the types of deeds and transactions that it can facilitate.

26 DP on *LR: Miscellaneous Issues* (n 19) para 7.30.

27 Ibid para 7.31-7.33.

28 Bankruptcy and Diligence etc. (Scotland) Act 2007, s 17.

the date of registration of the notice.29 This would be similar to the way inhibitions work: a notice of letters of inhibition is registered,30 which provides a period of twenty one days in which the inhibition itself can be registered on condition that the schedule of inhibition is served on the debtor after registration of the notice.31 If registration takes place within this period, the effective date of the inhibition is backdated to the date of service of the schedule of inhibition. If registration does not take place, the notice lapses.

Applying this backdating effect to priority notices would mean that a real right in the property could, retrospectively, be obtained prematurely.32 The priority notice would always be registered before the date of entry, and sometimes could be registered before conclusion of missives. To adopt this model would mean that ownership) would pass to the purchaser before settlement, but so too would liabilities incidental to ownership. It is easy to see why these proposals were not generally supported at the time.

However pressure on, and dislike of, the system of letters of obligation continued to grow. By the time the Scottish Law Commission was preparing its Report on Land Registration33 it had already received representations, including from the Law Society of Scotland, to look again at a priority procedure for land registration. The Report proposed a much more straightforward system of advance notices,34 that this time received a considerable degree of support from the profession.

The Report also contained a draft Land Registration Bill,35 which was the starting point for the Land Registration etc. (Scotland) Act 2012. The Bill introduced to the Scottish Parliament on 1 December 201136 differed in some material (and minor) respects from the draft Bill prepared by the Scottish Law Commission, but the proposals for a system of advance notice were largely intact.

29 DP on *LR: Miscellaneous Issues* (n 19) para 7.19-7.20.

30 Titles to Land (Consolidation) (Scotland) Act 1868, s 155.

31 Ibid. The addition of service of the schedule of inhibition on the debtor was amended by the Bankruptcy and Diligence etc. (Scotland) Act 2007, s 149, after the publication of the DP.

32 DP on *LR: Miscellaneous Issues* (n 19) para 7.34.

33 Scot Law Com No 222, 2010.

34 Report on *Land Registration* (n 33) part 14.

35 Ibid vol 2.

36 Available at http://www.scottish.parliament.uk/parliamentarybusiness/Bills/44469.aspx

#### (2) The statutory system of Advance Notices

#### *The principles of Advance Notices*

The statutory structure for advance notices in conveyancing transactions adopts the principles for providing a period of priority protection for deeds that are intended to be granted and intended for registration in the Land Register.37 The key elements of the advance notice procedure are:

#### *The detail of the Advance Notice protection*

The introduction of Advance Notices is a major transformation for conveyancing practice in Scotland, and one that many in the profession would regard as long overdue.

The Advance Notice concept is similar to, but not exactly the same as, the priority period which currently exists for registration of documents in the Land Registry of England and Wales. In England and Wales it is tied in with a register search. The system that now applies in Scotland

37 See generally Land Registration etc. (Scotland) Act 2012, Part 4. Specific provisions are discussed in detail below.

38 There is something of a conceptual non sequitur in the way the legislation has been drafted, discussed further below.

39 There is nothing in the legislation about multiple consecutive advance notices for the same deed, but in theory this is technically possible although, in practice, unlikely.

borrows from both the English system40 and the system that applies in Germany.41

It should be borne in mind that the advance notice procedure is voluntary. There is no compulsion to use it, but the advantages of it over the flawed and precarious letter of obligation alternative are compelling.

Under the provisions of the 2012 Act, it is possible to apply to the Keeper for an advance notice in respect of a deed that a person intends to grant.42 For a fee of £10,43 an advance notice application can be submitted,44 for example when a seller has agreed to sell a piece of his land, and consequently will be granting a disposition in favour of the purchaser.

The advance notice application is submitted to the relevant register in advance of the completion date for the transaction, and once it is registered, it provides a period of protection of thirty-five days (beginning with the day after the advance notice is registered in the relevant register)45 in which any competing deed, or another advance notice, would not have priority.46

So, for example, if the seller registers an advance notice for a disposition over his property that he intends to grant in favour of the purchaser, and then some other person presents a competing disposition for registration in respect of the property in question, although the competing disposition would be entered onto the Register initially, the existence of the earlier advance notice would prevent the competing disposition from prevailing, provided always that the purchaser with the benefit of the advance notice submits his disposition for registration within the thirty-five day period of protection.

However, if the purchaser fails to submit his disposition within the thirty-five day period, in that case, the earlier registered disposition will take effect at the expiry of the thirty-five day period.

Advance notices apply to other types of deed, such as a standard security or deed of servitude, and also to a registrable lease or sub-lease,

40 The Land Registration Act 2002 and Land Registration Rules 2003.

41 German Civil Code BGB, Articles 883 to 888.

42 Land Registration etc. (Scotland) Act 2012, s 56.

43 The Registers of Scotland (Fees) Order 2014, SSI 2014/188, sched 1, para 3(b).

44 Land Registration etc. (Scotland) Act 2012, s 57.

45 Ibid, s 58.

46 Ibid, ss 59-61.

but the deed must be a bilateral one,47 that is, with a granter and a grantee.48 Unilateral deeds, such as a local authority charging order, are not covered, nor actually are they likely to have need of advance notice protection.

Only a person who intends to grant the deed and may validly grant the deed can apply for an advance notice.49 However, a person with the consent of such a person may also apply.50 The statutory wording is a little problematic in a situation where the purchaser wants to register an advance notice for a deed that the purchaser plans to grant as part of the purchase transaction, for example, a standard security in favour of its heritable creditor. Only the purchaser can *intend* to grant that deed, but there is an argument that the purchaser may not *validly grant* the deed until it is the owner, therefore it needs the consent of the seller to apply for the advance notice. But in these circumstances, the seller cannot *intend to grant* the standard security by the purchaser, so neither of the parties can fulfil the two part statutory requirement: (i) intention to grant and (ii) ability validly to grant, at the time of applying for the advance notice. However, unless the effect of the statutory provision is to permit a purchaser to apply for an advance notice of this type, its inclusion in the 2012 Act is pointless. The Registers are in no doubt that the intention of the legislation was that a purchaser would be able to register an advance notice for a standard security it intends to grant, if it has the consent of the seller, and that they will accept such applications.51

An application for an advance notice can be made for a title that is recorded in the General Register of Sasines, as well as for titles that are registered in the Land Register.52 As all dispositions, whether for valuable consideration or not, induce a first registration under the provisions of the 2012 Act, if the title is still in the Sasine Register, advance notices can be recorded in the Sasine Register in those cases. For a title that is already in

47 Note however that it is not currently possible to apply for an advance notice for any bilateral deed. Renunciation of leases and section 75 agreements are two obvious examples of deeds that are conspicuous by their absence from the current advance notice application system.

48 Land Registration etc. (Scotland) Act 2012, s 56(1).

49 Ibid, s 57(1) and (2)(a).

50 Ibid, s 51(2)(b).

51 Registers of Scotland. *Land Registration etc. (Scotland) Act 2012 General Guidance – Advance Notices*, available at https://www.ros.gov.uk/about-us/2012-act/general-guidance/ advance-notices

52 Land Registration etc. (Scotland) Act 2012, ss 59 and 60.

the Land Register, the advance notice will be registered in the application record of the Land Register.

If for any reason settlement of the transaction is delayed, it is possible to apply for another advance notice giving the purchaser (or other grantee as appropriate) another thirty-five day period of protection. However, it is important to note that this is not an extension of the first advance notice period: it is a separate period of protection. So, in the example above, the competing disposition submitted during the first thirty-five day period would remain on the Register and the second priority period will not protect against it. The competing disposition would of course show up on a search of the Register, which it is recommended be obtained up to a date when the advance notice to be relied on by the purchaser is disclosed in that search. That search would also disclose the competing disposition alerting the purchaser to its existence. This would mean that the purchaser ought not to proceed to settlement without requiring the seller to take steps remedy the position, should he still wish to buy the property. In the face of a competing disposition, no purchaser would be expected to proceed.

Once an advance notice is on the application record of the Land Register, or in the Sasine Register, it is possible to apply to have it discharged, while it is current (i.e. during the thirty-five day period).53 The circumstances where this will be necessary may occur from time to time, but as a general rule there is no need formally to discharge an advance notice. It will expire automatically at the end of the thirty-five day period, and the Keeper will remove it from the application record in the Land Register, and archive it.54 Most advance notices will therefore simply be allowed to lapse. If an applicant wants to have an advance notice discharged, it must obtain the consent of the person in whose favour the notice has been registered (e.g. the purchaser). This will ensure that the protection given by an advance notice is not cancelled without the knowledge and permission of the person benefitting from the protection.

One innovative effect of an advance notice is that, if an inhibition is registered against the granter of the deed during the protected period, provided the protected deed is registered during the protected period, it

53 Land Registration etc. (Scotland) Act 2012, s 63.

54 Ibid, s 62. An advance notice recorded in the Sasine Register will always be shown on that Register. While a formal discharge of such an advance notice can be recorded, it will be evident from the date of recording of the advance notice when its protection will have expired after thirty-five days.

will not be affected by the inhibition.55 This could mean, in circumstances where an advance notice is submitted before conclusion of missives and the inhibition is also registered before a contract was in place, but after the protected period of the advance notice has begun, that nonetheless the purchaser's deed would be protected, and he could complete the purchase. This represents a change in the law of inhibitions,56 although it is unlikely that this particular convergence of circumstances will happen very often.

There are some entries in the Registers that an advance notice does not affect. Notices of potential liability for costs under the Tenements (Scotland) Act 200457 or the Title Conditions (Scotland) Act 200358 are specifically carved out from the effect of the advance notice protection.59 Scottish Ministers have the power to specify other deeds that should prevail despite the existence of an advance notice on the Register.60

#### (3) Conveyancing procedures for Advance Notices

The statutory provisions relating to advance notices provide what advance notices are, who may apply for them and what their effect will be. But they are voluntary, and therefore there is nothing in the 2012 Act that sets out how they are to be used in a transactional context. So it has been up to the conveyancing profession to work out how to use the advance notice procedure in practice.

The (PSG)61 took on the task of considering how this would work in practice, and it produced a recommended form of wording for offers62 that sets out the steps for parties to a typical sale and purchase transaction to take to implement the advance notice procedure. In doing so, the PSG wanted to ensure that the new process, that is now becoming an integral part of

55 Land Registration etc. (Scotland) Act 2012, s 61.

56 Under the previous law, an inhibition registered before conclusion of missives would prevail against the rights of the subsequent purchaser. Only sales completed in implement of missives concluded before the inhibition is registered are currently unaffected in these circumstances.

57 Tenements (Scotland) Act 2004, s 12(3).

58 Title Conditions (Scotland) Act 2003, s 10(2A).

59 Land Registration etc. (Scotland) Act 2012, s 61(3).

60 Ibid, s 61(3)(b).

61 A group of four commercial property lawyers, including the writer, from four of the major Scottish firms, who have worked together for over a decade to produce agreed form standardised commercial property documents which are available to the profession to access on the PSG website at www.psglegal.co.uk

62 PSG Offers to Sell incorporating 2012 Act wording are available to download at http:// www.psglegal.co.uk/offer\_to\_sell.php

conveyancing procedure, would be clear, and also as straightforward as possible. Although PSG styles are produced from the perspective of the commercial property lawyer, the PSG form of words, and general approach, has also been adopted (with some minor modifications) in standard form residential missives.63

Practical issues that the PSG had to consider in formulating the new wording included:

#### *The optimum time to obtain an advance notice*

The purchaser (or other grantee) will want advance notice protection to subsist until the application to register the deed in question has actually been submitted to the registers and has entered the application record. So the protection needs to extend beyond the settlement date, even if the purchaser's solicitor is going to personally present the deed for registration, and potentially for up to fourteen days after – or whatever reasonable period of time is appropriate. In reality it may be a lot closer to settlement before the advance notice application is lodged, to make sure that the maximum period of protection is available after settlement.

The PSG wording provides for submission of the advance notice application not earlier than five working days before settlement. This allows as much of the protected period as possible to cover the period after settlement, in case of delays, or rejection of the application first time around.

It is however a bit of a balancing act, and the parties to the transaction should be prepared to be flexible to suit the circumstances of the transaction. The Scottish standard clauses set out a longer period of ten days before the

63 The Scottish Standard Clauses for residential property transactions. For examples see http://www.lawscot.org.uk/rules-and-guidance/section-f-guidance-relating-toparticular-types-of-work/division-c-conveyancing/advice-and-information/scottishstandard-clauses/

date of entry in residential offers. The PSG approach proceeds on the basis that the more of the protected period that continues after settlement will mean that if the application for registration were to be rejected for some reason, there would be a good chance that the presenting solicitor could correct whatever was wrong with the application and re-submit it, all still within the protected period of the advance notice.

### *Compulsory or optional?*