The Moveable Transactions (Scotland) Act 2023 (MTSA) comes into force on 1 April 2025 and changes how security is taken over moveable assets in Scotland – bringing new opportunities for lenders and borrowers alike.

In addition to introducing a brand-new security right over corporeal moveables (the statutory pledge, which we cover in a separate blog), the MTSA completely overhauls the Scots law of assignations. 

If you are a lender or borrower operating in the Scottish market, please read on below, where we set out more detail as to the new opportunities and positive impact of these changes on different financing transactions.

If you want to learn more about how these changes will impact on funds finance, please refer to Andrew Christie and Jennifer Lio’s blog.

Background

Assignation is the method by which rights and other incorporeal assets are transferred under Scots law (the equivalent to assignment under English law). It has long been acknowledged by practitioners in Scotland that there are theoretical and practical issues with transferring and creating fixed security over incorporeal moveables under Scots law. The key restrictions under the current law are:

• the requirement to intimate (by letter) on each debtor/counterparty;
• the requirement that control over the assigned right has to be divested from the chargor; and
• the inability to assign future rights.

Each of these has been addressed in the MTSA, and as of 1 April 2025:

• intimation is no longer required to transfer the asset or, in the case of an assignation in security, create security, as long as the assignation is registered in the newly established Register of Assignations;
• where parties chose to intimate (for example, to put third parties on notice, or following an event of default), this can be done electronically;
• transfer or divestment of control over rights being assigned is no longer required; and
• future rights can now be assigned.

This will fundamentally change how security may be taken over receivables, contractual rights and bank accounts, and brings Scotland closer to the English security position. Indeed, the removal of the need to divest control means that Scottish fixed security does not run the same risk of an English fixed charge of being “downgraded” to a floating charge. 

Receivables and invoice finance

Given the challenges under the current law, receivables and invoice finance is less common in Scotland than it is in England, and as a result Scottish businesses have often be left with unrealised value in their unpaid invoices. The existing law makes effective security over a portfolio of small claims impractical and cumbersome, requiring regular rounds of intimations pursuant to trust arrangements. 

By allowing future rights to be captured and removing the obstacles of intimation and divestment of control, the MTSA takes away the existing difficulties in this area and opens up a new source of potential funding for Scottish businesses. This offers new opportunities for businesses of all sizes to stabilise their cashflow and boost their working capital. For lenders in the receivables and invoice finance market, it opens up a new Scottish market. 

Securitisation in Scotland

Similar to receivables and invoice financing, securitisation in Scotland currently requires complex trust arrangements, which allow an originator / seller to ringfence the traded receivables for the benefit of the issuer, whilst still retaining legal title. Although it is a neat solution to the restrictions of Scots law as stands (arising not only from the limitations posed by the law of assignations, but also the fact that Scots law does not recognise a split between legal and beneficial title), the process is prescriptive and administratively burdensome, especially where further advances or futures contracts are purported to be sold. In such cases, the originator / seller is required to enter into supplemental ‘top up’ trusts on a periodic basis in order to bring the newly originated receivables within the scope of the Scottish trust property. These new trusts, in turn, are then secured by way of supplemental assignations in security by the issuer in favour of the relevant security agent(s).

The changes made by the MTSA will streamline the process of securitising Scottish receivables in a number of ways:

• It will be competent for the issuer / originator to grant a “day one” assignation over the relevant Scottish securitisation assets. This will largely mirror the English equitable assignment approach and will replace the existing trust structure.
• The assignation will also capture future receivables, and therefore there will be no need to enter into supplemental declarations of trust. This is a very welcome change, which will remove the period of exposure between the date of origination of the receivable and the date that the supplemental trust is granted, which can be anything between a few weeks and months.
• The issuer can grant an assignation in security in respect of its interest in the relevant Scottish securitisation assets. Again, there will be no need for supplemental assignations to be taken for future-acquired assets.
• Intimation by way of reference to a website or portal will be possible and will be a significant commercial benefit. Registration in the new Register of Assignations can be used as an alternative to the requirement to intimate.
  
  

Unfortunately, the benefit of the reforms will not be universally felt. Any transactions involving heritable interests, such as residential mortgage-backed security transactions, will not qualify under the new regime and the traditional approach will continue to apply in those scenarios. However, for those transactions that do qualify, the MTSA represents a welcome closer alignment of approach north and south of the border.

Real estate development finance 

Apart from security over the land itself, security over the principal development contracts and any key agreements for lease is the most important security for a lender on any development finance deal. The security ensures that, in certain distressed situations, the lender is able to step in and take over the development, to maximise value and the chances of financial recovery. 

The changes brought in by the MTSA will reduce the administrative burden currently associated with intimating multiple notices on development parties. It will also ensure that rights under future development contracts will be caught by the original assignation, ensuring a seamless effective security over the whole development package. This eliminates the need for further security as conditions subsequent, something which currently adds transaction costs for borrowers.

Real estate investment finance  

Fixed security over rental income is, aside from security over the property itself, the primary form of fixed security that lenders seek for any real estate investment financing. There are three primary challenges posed by the current law: firstly, the administrative burden of notifying all tenants (which, for e.g. a large shopping centre, can be in the hundreds); secondly the need for the borrower to divest control over the rental income to the security holder, and thirdly, the fact that the assignation will only capture leases in place on the day the assignation is effective. 

This second challenge is of particular note. Rental income is valuable cashflow for the borrowing group, and losing control of that asset is impractical and cumbersome. The alternative, where the tenants are notified of the assignation but are also allowed to continue paying the rent to the landlord as normal until notified to the contrary, undermines the effective creation of the fixed security. 

As a welcome change, the MTSA removes these challenges around the control of the rental income, as well as the administrative burdens and costs associated with intimating to tenants. It also allows the security to capture future leases, removing the need for supplemental security at a later date. In addition, funders will have the option (as an alternative to intimation to the tenants) to create effective security by registration of the assignation in the Register of Assignations This will allow parties to keep the security arrangements confidential (subject of course to any third party checking the register).

Security over student accommodation rental income

The problems highlighted above in respect of security over rental income are especially acute in student accommodation financing. Taking effective security over Scottish student accommodation rental income has long been a challenge, due to, firstly, the need to intimate to a large number of tenants, and secondly, the inability under the current law to take security over future income (which, for assets such as student accommodation, is a particular problem given the high turnover of tenants). These challenges have resulted in significant costs for student accommodation operators by way of administration (intimation as a matter of market practice being a borrower responsibility) and legal fees for supplemental securities (often required on a regular basis to capture changes to tenants). From the lender perspective, the security package currently available is often suboptimal since common market practice to date has been for intimations (which is the first point in time a fixed security can be created) not to be issued until an event of default. 

The MTSA removes the two primary obstacles by: 

• removing the need for intimation, as the assignation may now  be registered in the Register of Assignations; and
• allowing assignations of rent to cover future rental income, meaning that the high turnover of tenants no longer undermines the value of the security. It also removes the need for supplemental securities on a regular basis

Given the activity in the student accommodation market in Scotland at the moment, the ability to maximise the underlying value of the asset in this way will be a welcome development for lenders and borrowers alike, and again make Scotland a more attractive market for lenders. 

Fixed security over bank accounts        

Fixed security over Scottish bank accounts has historically come with a range of difficulties as a result of the legal rules referred to elsewhere in this note. In practice, security is not available where the account bank and lender is the same entity, and even where that is not the case, the issues around the inability to assign future claims and the requirement for effective divesting of control of the asset, mean that it has very limited use in relation to Scottish bank accounts.   The changes introduced by the MTSA, allowing for future assets to be assigned and removing the creditor control requirement, will entirely change the ability of lenders to take fixed security over Scottish accounts. It will place the Scottish position much closer to the existing position in England. Indeed, because MTSA assignations do not require the security holder to obtain and retain control of the asset, the so-called “recharacterization” risk in English law – whereby fixed charges can be tread as floating only, if there is insufficient creditor control over the secured asset – fixed charge account security will now be easier to obtain in Scotland than across the border.

Summary

We hope that you are as excited about these incoming changes and the associated opportunities as we are! For more information about how your business can benefit from the upcoming changes, please visit our Moveable Transactions Resource Hub.

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