A standard security is most commonly used in Scotland to secure a monetary debt, such as the loan for the purchase of a property, but it is also possible under Scots Law for a standard security to secure obligations. Such securities are often utilised in the context of renewable energy developments to secure a landowner's obligations under an option agreement (Obligation Security). However, the law is unclear in relation to how such standard securities work and what remedies are available under them, which raises questions as to what they actually achieve in practice and whether they are necessary.
The rules in relation to enforcement of a standard security under Scots Law seem to assume that the debt that is secured is a monetary one. The main remedy for a security holder in the event of a breach of the security is to "call up" the security, force the sale of the property over which the security is held, and recover the monies due to them from the sale proceeds.
This process is specifically designed to recover money. Therefore, it doesn't appear as though an Obligation Security, granted as part of an option to lease, could actually be used to force the landowner to grant a lease of the option area to the developer, if the landowner was refusing to do so – which is the remedy that a developer will most likely be looking for in that situation.
What is actually being secured?
Due to these enforcement difficulties, it is often suggested that what is actually secured by an Obligation Security is the monetary damages that would fall due in the event of a landowner breaching their obligations to a developer under an option agreement, rather than the obligations themselves.
However, this raises questions as to how such damages are to be quantified; it doesn't seem practical for a complex option agreement for a renewable energy development to specify what damages would be due in the event of specific breaches, which most likely leaves the question of quantification of damages to the court, making for a potentially lengthy and costly process for a developer seeking to enforce an Obligation Security.
Court case confusion
Despite the common assertion that an Obligation Security is securing damages, this is not settled law and in fact it was held by the courts in the 2018 case of JH & W Lamont of Heathfield Farm v Chattisham Ltd that an Obligation Security, securing a landowner's obligations under an option to purchase, did not extend to the payment of damages for asserted breaches of these obligations.
This case has been criticised for failing to apply what many consider to be the current law – that an Obligation Security is securing the damages that would fall due to a developer in the event of a breach of an option agreement by a landowner. However, the longstop date in terms of the option agreement in this case had been reached, allowing either party to terminate it, which seems central to the court's decision – they would have perhaps decided differently if the option agreement was still active and the landowner was refusing to sell the property upon the exercise of the option agreement by the developer.
In addition, the court emphasised the importance of the wording of both the option agreement and the standard security in determining what was actually being secured by an Obligation Security. It follows, that in order for an Obligation Security to secure the damages due by a landowner to a developer in the event of a breach of an option agreement, the security must expressly state that it is securing the payment of such damages.
Practical purpose of an Obligation Security
An Obligation Security serves an important practical purpose because it is registered against the landowner's title to the option area. An option agreement, which as a contract is only enforceable between the original parties to it, cannot be registered against the landowner's title to the option area. The existence of such a security makes it harder for the landowner to transfer (or grant rights over) the option area to third parties without the consent or knowledge of the developer. In practice, it is primarily for this purpose that we seek Obligation Securities.
It appears that in practice an Obligation Security obtained to secure, for example, a landowner's obligations under an option to lease, cannot effectively be used to compel the landowner to lease the property to the developer if they are unwilling to do so.
In addition, the ability of an Obligation Security to secure the damages that would fall due by a landowner to a developer in the event of a breach of an option agreement is unclear and, even if it can be used to secure such damages, the difficulties in quantifying them may render the process unappealing to a developer.
However, an Obligation Security, by virtue of the fact that it is registered against the landowner's title to the option area, undoubtedly serves a purpose in alerting third parties with an interest in the option area to the existence of an option agreement (or at least a developer's interest) over it.
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If you require advice related to securing a landowner's obligations in relation to a potential development, please get in touch with a member of our team.