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 Scottish Law Commission (“SLC”) - Heritable Securities: Default & Post Default
Banking & financial services

Scottish Law Commission (“SLC”) - Heritable Securities: Default & Post Default

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INSIGHTS

The discussion paper on heritable securities: default and post default (the “Paper”) is the second of three consultation papers for this project.

The first paper focused on the creation, assignation and extinction of heritable securities with the final paper looking at sub-security arrangements and securities for non-monetary obligations. The culmination of the three papers being a final report, including a draft bill, intended to revamp the law of heritable securities in Scotland, expected for publication in 2025.

The aim of the Paper is a systematic review of the process through which standard securities are exercised. While the SLC noted the lack of clarity in the current law, the Paper is aimed at improving the current law rather than a fundamental overhaul. The Paper is split into 16 Chapters and this notes only touches on some of the issues on which the SLC is seeking consultation.

Default

The SLC notes in the Paper that the current definition of ‘Default’ in the Conveyancing and Feudal Reform (Scotland) Act 1970 (the “1970 Act”) is complex but does not appear to include a failure to comply with the secured obligations (e.g. payment of the underlying debt obligation). The SLC notes that this definition isn’t aligned with the interpretation by the layperson (and many lawyers) leading to issues of interpretation.

The SLC propose that a security holder is permitted to exercise remedies under the standard security where: (a) there is a failure to perform the secured obligations (most commonly, payment of the loan instalments); or (b) any other circumstances as agreed between the debtor, owner and the security holder.

Notices

Under the 1970 Act there are two forms of notice (a calling-up notice or a notice of default). The current regime is complex with different remedies available to the creditor depending on the form of notice served. The SLC argue a strong case for the new regime to retain some form of notice, not least of all, to allow debtors the opportunity to resolve disputes without need for further action by the security holder.

However, they suggest it should be limited to the one form of notice to avoid the existing complexities and confusion (which, the SLC have suggested, could be known as a “default notice”). It is further suggested that the default notice would include details of the parties, the default, the possible remedies for the default, the time limit in which it requires to be remedied, the potential consequences for failure to resolve the default and a recommendation to seek legal advice. The Paper also seeks views on whether it would be beneficial to have prescribed methods of service and, if so, what these should be.

Furthermore, if one of the benefits of the notice is to remedy a potential default, the SLC seeks opinions on what time limit should be provided to allow for compliance. Currently, a calling up notice requires the debtor provides 2 months’ notice and 1 month for a notice of default. While the SLC note that these periods as being too long, they don’t provide any further guidance other than to suggest it not be restricted to less than 14 days.

Enhanced Debtor Protections

Currently, where the secured property relates to land used to any extent for residential purposes, additional steps are required by the creditor to protect the debtor. The creditor must comply with ‘pre-action requirements’ and apply to the court for warrant to exercise remedies. The SLC suggests that the current legislation fails to properly capture ‘the intent behind the legislation’. They propose that the enhanced debtor protections apply if two criterion are satisfied; firstly, the debtor or owner of the secured property is a natural person and, secondly, that the security property comprises or includes a dwelling house.

Ejection

If a security holder has taken possession of the property but persons remain in occupation, the security holder may apply to the courts for a decree of ejection. The SLC notes that while ejection is routinely sought as part of the enforcement process, the basis is not in the 1970 Act but rather under the Heritable Securities (Scotland) Act 1984 (the “1984 Act”) or common law. The SLC propose that, in keeping with their overarching principle of streamlining this area of law, all statutory remedies should be available under the new legislation and the 1984 Act dis-applied to standard securities. The Paper also seeks clarity as to what process is required for the removal of tenants from the secured subjects – is decree against the landlord to be sufficient or will the creditor require to take an additional action under the relevant tenancy legislation? Finally, the Paper notes the ambiguity on the issue of liability of the security holder to the moveables left behind at the secured property and suggests that the new legislation provide clarity to this area.

Possession

The Paper highlights the lack of clarity as to what constitutes lawful possession by a heritable creditor and suggests that any new legislation should address this issue. It is proposed that the new legislation includes a non-exhaustive list of what would constitute being “in possession”. Additionally, the new legislation should make clear the implications of taking said possession.

Expenses

The SLC notes the contrast of Standard Condition 12 under the 1970 Act (which states that the debtor is personal liable to the creditor for all expenses reasonable incurred by the creditor in calling-up the security and realising or attempting to realise the security subjects and exercising any other powers conferred under the security) and judicially awarded expenses. The SLC suggest that expenses are only recoverable insofar as agreed between the parties or awarded by the courts.

Conclusion

The SLC are asking that any comments on the Paper be submitted by 1 April 2022. As the Paper highlights, the area of law would benefit from some improvement. This is a welcomed opportunity for practitioners in the area to be able to influence the evolution of the law in this area.

Read the paper

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CONTACT US

Get in touch

Call us for free on 0330 159 5555 or complete our online form below to submit your enquiry or arrange a call back.