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4. SUPPORT FOR CROFT HOUSING

4.1 Background

4.1.1 The CoIoC recommended changes to the way support for croft housing is provided. This included amending the Registration of Leases (Scotland) Act 1857 to make a crofting lease registrable and hence eligible for standard securities.

4.1.2 The Government recognises that securing finance for housing is a key issue for crofters and is vital to increasing the population of remote, rural areas and in strengthening the rural economy. It acknowledges the difficulties crofters face in accessing loans to develop croft housing and that decrofting the house site is often a necessity in order to access loan finance.

4.1.3 In its response to the final report of the CoIoC, the Government accepted the principle that crofters should be able to obtain loan finance without the necessity of decrofting but indicated that this may require more than amending the Registration of Leases Act. It also agreed to consult with the Committee of Scottish Clearing Bankers in order to determine what lenders would require before they had sufficient confidence to lend to crofters using a croft tenancy as security for a loan. The Government considers that the private sector is better placed to provide and operate loans and is not in favour of reintroducing the loan element of the former Crofters Building Grants and Loans Scheme.

4.1.4 The Government has given further consideration to the use of the 1857 Act and has concluded that the desired outcome would be better achieved by making specific provision in crofting legislation to enable a standard security to be taken over a crofting tenancy. Two key considerations in building the confidence of banks to lend to tenant crofters is certainty over the security against which a loan is made and the efficiency of any mechanism for recovering the loan in the event that a crofter defaults.

4.1.5 In addressing the first of these concerns, the proposals for a new Crofting Register set out in Chapter 3 are vital. The new register will provide legal certainty over the extent and interests in crofts. It will also allow for a standard security to be recorded against the tenancy in a similar way to the Land Register. In providing an efficient mechanism for recovery, use of existing processes wherever possible was advocated. Furthermore, it would be necessary to amend or suspend some of the requirements of the Crofting Acts in the event that a standard security was granted over the croft or if the creditor calls up a loan.

4.1.6 The ColoC also recommended an enhanced Croft House Grants Scheme, designed to permit house building or improvement without decrofting. It would not be available to those who decroft. The Government proposed to take forward an immediate review of the Croft House Grants Scheme alongside two other rural housing schemes (the Rural Home Ownership Grants Scheme and the Rural Empty Property Grants Scheme). These proposals do not require new legislation and an update on progress on this is provided in Chapter 8 of this consultation document.

4.2 Issues for consideration

4.2.1 Support for croft housing proposals

4.2.1.1 It is clear from the sale of crofts and croft tenancies that crofts have a commercial value. Crofts have a capital value, in that they can either be sold outright or the tenancy can be sold (with the assignation subject to the agreement of the Commission). Moreover, for crofting tenancies, the outgoing tenant is entitled to be compensated for any permanent improvements made to the croft such as houses, farm offices, drains, walls, fences, etc. whether the crofter voluntarily departs or is removed from the croft. A croft also has income value, in that it can be used to generate income through a number of means, such as farming, subsidy income, and through letting out additional houses on the croft as holiday homes.

4.2.1.2 However, it is difficult for crofters to use this asset as security for obtaining loan finance. In particular, tenant crofters are unable, under the current law, to grant a standard security over their tenancy. Instead, tenant crofters are usually required to exercise their right to buy so that they can then grant a standard security over the croft land that they own. In order to make the secured asset more attractive to lenders, the land usually needs to be decrofted so that it is not subject to crofting regulation.

4.2.1.3 The Government's proposals in the draft Bill will, subject to agreement of the creditor to lend, enable tenant crofters to secure a loan against their tenancy and provide greater confidence for lending institutions so that tenant crofters do not need to purchase and decroft any part of their croft to secure a loan. This is consistent with the Government's objective to retain land in crofting tenure and to protect the link between a croft and the croft house.

4.2.2 Process for granting and discharging security

4.2.2.1 The draft Bill includes provisions that enable crofters to take a standard security over a crofting tenancy. In most cases, the Government fully expects loans to be repaid in full and the security to be discharged as is normally the case. The following steps outline the process that would be followed for a crofter granting a standard security over his croft tenancy.

Step 1 - Registering the tenancy on the Crofting Register

4.2.2.1.1 First, the crofter must register his tenancy on the new Crofting Register being proposed by this draft Bill and obtain a tenancy registration certificate indicating his title to the croft tenancy. The Crofting Register will bring legal certainty on the extent of, and interest in, a croft as once the details have been permanently recorded in the register they will not be challengeable.

Step 2 - Granting the standard security

4.2.2.1.2 Once the crofter has obtained his registration certificate, he may then proceed to grant a standard security over the tenancy in security for a loan. The security will be completed (ie the security becomes a real right itself) when registered in the Crofting Register.

Step 3a - Crofter repays loan

4.2.2.1.3 The crofter repays the loan in full as agreed with the lender and the security is discharged.

Step 3b - Crofter defaults on loan

4.2.2.1.4 If the crofter defaults on his loan payments, the creditor will have the option of calling up the security. The creditor will have a number of options at his disposal on calling it up: assigning the tenancy; taking possession of it; or, if necessary, taking full title to the tenancy by obtaining a decree of foreclosure.

Step 4 - Discharging the standard security

4.2.2.1.5 Once the loan has been paid in full, the creditor may discharge the security in the normal way. That discharge must be recorded in the Crofting Register.

4.2.4 Modification of rights and responsibilities when a standard security is granted over a croft

4.2.4.1 In order for creditors to have the confidence to lend to both tenant and owner-occupier crofters, it will be necessary to modify some of the rights and responsibilities under the Crofting Acts where a standard security has been granted over a croft. As is normally the case with non-croft land, it will not be possible for the crofter or landowner to do anything that might significantly affect the value or interests in the security without seeking the consent of the creditor first. Therefore, the draft Bill makes it a requirement for the consent of the creditor to be given before any action can be taken in respect of the following:

• Enlargement of a croft
• Renunciation of tenancy
• Assignation of a croft
• Division of a croft.

4.2.4.2 It should be possible for a tenant crofter to sublet the croft (or part) while retaining the tenancy without agreement from the lender so long as repayments continue to be made to the lender by the borrowing tenant. The proposed sublet should continue to be required to be approved by the Crofting Commission. This should allow the tenant to sublet the croft for short periods, for example, for holiday lets. It may, on occasion, be necessary for the tenant crofter to sublet part of the croft to raise funds to meet outstanding loan re-payments.

4.2.4.3 Where a landlord considers a tenant crofter to be in breach of the statutory condition that requires the croft to be kept in a fit state for cultivation (except where doing so is incompatible with the purposeful use that has been previously agreed with the landlord) and decides to serve a notice on the crofter, the landlord must also copy the notice to the creditor. If the crofter desires to change the use of the croft, the crofter must obtain the creditor's consent as well as the consent of the landlord and the Commission.

4.2.4.4 The Crofting Acts currently allow the landlord and any member of the crofting community in the locality of the croft to complain to the Commission that there has been a breach of the statutory conditions. It is proposed that the Commission will be required to notify the creditor as well as the crofter where a complaint has been made. The Crofting Acts also set out a notice procedure which must be followed before the landlord or the Commission may apply to the Land Court for termination of the tenancy for misuse or neglect. A copy of this notice should also be provided to the creditor.

4.2.4.5 The Crofting Acts currently require the Commission to give a tenant crofter and the landlord six months' notice of their intention to make an order terminating the tenancy of a crofter where the Commission has determined the crofter not to be ordinarily resident on, or within 16km of, the croft. It is proposed that any such notice should be copied to a creditor that has taken a security over the croft.

4.2.4.6 The Crofting Acts currently allow the Commission to prepare a reorganisation scheme for a township in order to secure the preservation or development of the township. A number of parties are required to be consulted before a reorganisation scheme takes place and it is proposed that creditors should be added to this list.

4.2.5 Options for creditor when standard security is called up

4.2.5.1 The Conveyancing and Feudal Reform (Scotland) Act 1970 provides for the calling up of a standard security and sets out the rights of a creditor on default. It is proposed that the rights of a creditor should be the same as for any other property interests. If a tenant crofter defaults on his loan payments, and the creditor calls up the security, the draft Bill provides the creditor with the following options:

Option 1 - assignation/sale: The creditor calls up the loan, has the power to act as the crofter, but does not take possession of the croft. Therefore, the creditor can assign the tenancy, subject to the consent of the Commission. If a creditor assigns without consent, the assignation is void and the Commission may declare the croft to be vacant.

Option 2 - entering into possession: The creditor can enter into possession of the tenancy, thereby acquiring the occupancy rights of the crofter. However, the creditor may choose not to exercise these rights and may allow the crofter to remain on the croft. Whoever occupies the croft would be responsible for meeting the requirements of the crofting acts. The crofter would still be responsible for meeting the requirements of the crofting acts.

Option 3 - decree of foreclosure: The creditor can apply to the court for a Decree of Foreclosure to transfer the tenancy to the creditor. However, the creditor would not automatically have a crofter's right to buy and would need to apply to the Commission to do so.

4.2.6 Modification of rights and responsibilities when creditor enforces the security

4.2.6.1 The draft Bill provides a number of modifications to rights and responsibilities which are necessary to enable a creditor to enforce his security. These are detailed below and may apply in respect of tenant and owner-occupier crofters.

4.2.6.2 The statutory requirements on crofters to cultivate the croft or put it to purposeful use would be suspended where a creditor exercises its occupancy rights or receives a Decree of Foreclosure. A breach of these requirements would ordinarily allow the landlord and the Commission to take action to terminate the tenancy or declare the croft vacant. The intention behind suspension of these statutory conditions is to make the realising of a security more feasible for lenders, and therefore more attractive for granting loan finance.

4.2.6.3 However, the other statutory conditions that apply to tenant crofters, such as rent and not injuring the croft by allowing dilapidation of buildings on it, should still apply, as their suspension would be seen as unfair on the landlord's interest in the land. It is expected that the creditor would wish to ensure buildings are maintained in any case so as not to devalue its interest.

4.2.6.4 The draft Bill gives power to the Commission to apply to the Land Court for an order to terminate the tenancy, declare the croft vacant and remove the tenant from the croft where there has been a breach of any of the statutory conditions. Where an application for an order is made once the creditor has called up a loan, the draft Bill provides for the creditor to be able to make objections, which the Land Court must consider before making an order.

4.2.6.5 Where a tenancy is renounced, the draft Bill allows a creditor who calls up a security under options 1 or 2 to hold onto the security (ie not to discharge it) until the creditor receives the landlord's payment for improvements.

4.2.6.6 The draft Bill allows a creditor who calls up a standard security and enters into possession whether or not proceeding to foreclosure (ie options 2 or 3) to divide the croft, subject to obtaining the consent of the Commission.

4.2.6.7 Where the creditor calls up a standard security and takes title to the tenancy through a Decree of Foreclosure (ie option 3), the draft Bill prevents the creditor from having an automatic right to buy the croft. Instead, the creditor will only be able to exercise that right, or decroft the land, with the consent of the Commission. The Commission must be satisfied that the creditor has taken reasonable steps to sell the croft tenancy before allowing a creditor to exercise those rights. Advice would be provided on what are considered to be reasonable steps.

4.2.6.8 The Crofting Acts make provision for the ranking of securities over loans granted by the Scottish Ministers and Highlands and Islands Enterprise. Consideration is being given to repealing this provision as regards any agreement made after the new Bill comes into force - so Ministers and HIE would take out a standard security if necessary and enter into a ranking agreement. It is not intended that this section should disadvantage any other creditor taking security where an existing loan agreement is in place.

4.2.6.9 The draft Bill provides for the sections of the Crofting Acts relating to absentee crofters and vacant crofts not to apply where a creditor calls up a standard security over a tenancy and exercises its occupancy rights (ie options 2 or 3). In such a situation, the creditor could not be regarded as absent and the croft should not be regarded as vacant.

4.2.6.10 Where a creditor calls up a standard security and an application is made by the landlord or the Scottish Ministers to remove a crofter still in possession of the croft, it is proposed that notice must also be given by the applicant to the creditor. The creditor should also be able to make objections to the Land Court, which it must take account of before making any order under this section.

4.2.6.11 Where a crofter is entitled to any compensation for permanent improvements and a creditor has called up a standard security, the draft Bill provides that the creditor may require compensation to be paid directly to them as payment towards any outstanding debts. On the death of a crofter, it is envisaged that payments will be made to the executor first, who will then be liable to pay creditors in accordance with any ranking agreement.

4.2.6.12 The draft Bill provides that creditors who take full title to croft land and become owner-occupiers would have the following routes to decroft their holding:

• They may apply to the Land Court to resume the land. If the Court grants an order, the land is taken outside the scope of the Act's regulation. The Land Court should not grant the order unless it is satisfied that the creditor has been unable to find a suitable willing purchaser or tenant for the croft.
• They may apply at any time to the Commission for a decrofting direction if the croft is vacant. Where the direction is given, the Commission should not grant it unless it is satisfied that the creditor has been unable to find a suitable willing purchaser or tenant.
• The Crofting Acts confer powers on the Commission to terminate a crofter's tenancy where the crofter is absent. If the croft remains unlet for a period of six months after that, the landlord may require the Commission, within three months of the six month period ending, to give a decrofting direction. The property is decrofted when the direction is granted. The Commission should not grant it unless it is satisfied that the creditor has been unable to find a suitable willing purchaser or tenant.

4.2.7 Conclusion

4.2.7.1 The support for croft housing proposals will provide opportunities for crofters to secure a loan against their tenancy and provide greater confidence for lending institutions so that tenant crofters do not need to purchase and decroft any part of their croft to secure a loan. Registering a tenancy in the Crofting Register should provide the necessary legal certainty for lending institutions on the extent of, and interest in, a croft similar to the Land Certificate presently issued by the Registers of Scotland for any other property being used to grant a standard security.

4.2.7.2 While the Government fully expects crofters, like any other borrower, to repay a loan in full, the draft Bill provides a process for granting and discharging a standard security over a croft, a mechanism for creditors to take action to secure their interest in the event that a crofter defaults on loan repayment and clarification of responsibilities of crofters and creditors where a croft is used to secure a loan. These proposals adopt standard practice so far as possible and are designed to be fair and reasonable to both crofters and lending institutions.

4.3 Regulatory and Equality Impact Assessment

4.3.1 Issue

4.3.1.1 Crofters currently find it difficult to use the value of their croft tenancy to secure loan finance because they are unable, under current crofting law, to grant a standard security over their tenancy. Furthermore, lenders prefer crofters (tenants or owner-occupiers) to remove land from crofting tenure so that the security is not subject to crofting regulation. The Government believes that crofters should be able to obtain loan finance without the necessity of decrofting and recognises that the crofter's ability to secure funding for housing is a key issue in crofting communities.

4.3.2 Objective

4.3.2.1 The objective of the provisions in the draft Bill is to enable tenant crofters to secure a loan against their tenancy and to give lending institutions greater confidence to lend to crofters so that they do not need to decroft land to secure a loan.

4.3.3 Potential Risks

4.3.3.1 Potential risks associated with the support for croft housing provisions include:

• Provisions provide insufficient confidence to lending institutions who then decide not to lend to crofters
• Lack of access to finance results in crofters being unable to afford to build or renovate necessary croft housing
• Lack of croft housing leads to a decrease in new entrants to crofting and unsustainable crofting communities.

4.3.4 Options

4.3.4.1 In broad terms, three options are available:

(i) Do nothing

(ii) The Government provides loans to crofters or

(iii) Make provision in the proposed crofting Bill to enable crofters to access private loan finance.

4.3.5 Benefits

4.3.5.1 Option 1 involves no change. This in effect, would mean the continuation of decrofting in order to access loan finance. This is contrary to the Government's aim of retaining land in crofting tenure and maintaining the link between the croft house and croft, thus protecting the integrity of the croft as an agricultural unit.

4.3.5.2 Option 2 would enable crofters to access loan finance and would help to keep land in crofting tenure. However, it would limit public spending elsewhere. The Government does not have the power to borrow money itself so loans would have to be funded through the Scottish Consolidated Fund. Furthermore, it has less expertise in providing financial products and may not be able to offer competitive interest rates.

4.3.5.3 Option 3 would enable crofters to access loan finance and would keep land in crofting tenure. It should also provide the confidence and safeguards necessary for lending institutions to lend using crofting assets as security for loans.

4.3.5.4 The Government decided to proceed with Option 3 and its proposals are set out in section 4.2 of this document.

4.3.6 Impact on stakeholders

Crofters

4.3.6.1 It is considered that crofters will benefit from these proposals as they will be able to access loans without having to take ownership of the land and decroft. They will be able to access the loan finance market and seek competitive interest rates in a similar fashion to tenants and owners of property that is not in crofting tenure. There will be a cost associated with registering the croft on the Crofting Register and amending details of securities held over crofts as is currently the case with the Land Register.

Landowners

4.3.6.2 Crofters who can access loan finance without taking the land out of crofting tenure will not have to exercise their right to buy and decroft the land to secure a loan. This would result in less work and legal expense for landowners as they will not be required to transfer the croft land to the tenant crofter through the right to buy process, produce title deeds, take legal advice, etc.

Crofters Commission and other NDPBs

4.3.6.3 The Crofters Commission is presently required to determine decrofting applications. If a crofter is not required to decroft to secure a loan, there may be a reduction in decrofting applications. The Commission will have to copy notices to creditors where it is taking action against a crofter for failing to comply with crofting regulation, which might result in a minor increase in administrative workload.

Registers of Scotland

4.3.6.4 The Registers of Scotland will have responsibility for operating and maintaining the Crofting Register and, as such, will receive applications from crofters and their representatives to amend the register to reflect details of any creditor holding a standard security over the croft. This is likely to lead to an increase in business for the Registers of Scotland, who make a charge for amending the registers that they hold.

Lending institutions

4.3.6.5 The impact on lending institutions will be dependent on the number of new customers they receive. The proposals are designed to fit in with existing lending and recovery practices although lenders may wish to prepare loan agreements specifically for crofters that require adherence to the crofting acts as a condition of any loan. The decision on whether or not to provide a loan to any individual crofter will be a financial decision for the lender based on the security offered for the loan and an assessment of the crofter's ability to repay the loan.

4.3.7 Costs

4.3.7.1 It is expected that there will be no costs to crofters other than those normally associated with obtaining a loan from a lender. These charges may vary depending on the lender. The costs to the Government and to crofters associated with the Crofting Register are detailed in section 3.3.

4.3.7.2 No increase in costs is expected for the Crofting Commission. The minor additional administration associated with sending copies of notices to creditors is expected to be offset by a reduction in decrofting applications.

4.3.7.3 Lenders may incur some initial costs establishing model loan agreements for crofters but it is considered that these will be offset by the benefits of accessing a new market. Costs of providing and operating loans will be recovered by the interest paid by crofters in the normal course of business.

4.3.8 Small Firms Impact Test

4.3.8.1 It is not considered that the provisions relating to support for croft housing will impact negatively on small firms. It is considered that it will impact positively as crofters who have a commercial business on the croft, or elsewhere, may use the croft as security for a loan.

4.3.9 Competition Assessment

4.3.9.1 It is not considered that these proposals will create any comparative advantage or disadvantage within the sector. In applying for loan finance from lending institutions, crofters will be free to approach any lender and are not restricted to any individual lender. Equally, there is no competition issue for lenders as all lenders will continue to be able to advertise their products to crofters and others as is presently the case.

4.3.10 Enforcement and Sanctions

4.3.10.1 The proposals in the draft Bill to enable crofters to access private loan finance create no new sanctions.

4.3.11 Equity and Fairness

4.3.11.1 Providing an opportunity for crofters to use their tenancy as security over a loan creates no barriers in relation to race, age, sex, income, religion, sexual orientation or disability. A decision on whether or not to provide a loan to any individual crofter will continue to be a matter for the lender on a case-by-case basis and subject to a number of case-related issues, such as how much income and financial commitments an individual has and the capability of an individual to meet repayment requirements. In this respect, crofters are no different from any other potential borrower, and the proposals seek to ensure crofters are treated equally with other borrowers. The ability to afford loan re-payments is likely to be the most significant issue for both the borrower and the lender in any decision to lend, and there is an element of risk attached to any loan.

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