The case of Wilson concerned the interpretation of a provision in the Conveyancing and Feudal Reform (Scotland) Act 1970 (CFR) to determine what remedies are available to a creditor where the debtor has breached the terms of a loan, such as a mortgage, that is secured by a standard security.
Since the CFR came into force a standard security is the only fixed security that can be held over land and heritable property situated in Scotland. It is widespread practice for Scottish mortgages to be secured by a standard security.
When Wilson was heard the universal understanding was that, for monetary breaches – i.e. where the mortgagor had failed to make a payment on time and so had fallen into arrears – lenders had two recourses.
The first was to serve a calling up notice on the mortgagor requiring payment of the outstanding loan in full.
The second was that the lender could raise court proceedings for the right to enter into possession and sell the property under s24 of the CFR. In practice the majority of creditors did not serve calling up notices but immediately sought the power of sale by applying to the courts.
This all changed following Wilson where the Supreme Court unanimously held that it was mandatory to serve a calling up notice. As a result dozens of court actions had to be dismissed as they had proceeded on the basis that a calling up notice was not required.
A bump in the road
Prior to the Wilson judgement the Home Owner and Debtor Protection (Scotland) Act 2010 was brought into law requiring creditors - in all cases where land is used to any extent for residential purposes - to raise s24 proceedings prior to exercising their rights under the standard security.
For the past three years courts have been attempting to marry the legislation and the Wilson decision to give a consistent application. As a result lenders must now serve a calling-up notice, as per Wilson, and on its expiry after two months raise s24 court proceedings as per the 2010 Act. While this double hurdle was not the intended consequence of the legislation a consistent interpretation has been applied albeit one that firmly places an additional burden on the lender.
The default position
The 2010 Act introduced a number of pre-action requirements that must be satisfied in residential cases before repossession proceedings can be raised. These include giving clear information to the debtor on the terms of the security, the arrears, the outstanding sum due, and making reasonable efforts to agree proposals for future payments "as soon as is reasonably practicable" upon the debtor entering into "default".
This early notification was designed to increase the prospect of early remedial action which would save stress, time and expense and minimise the need for court action.
The drafters of the 2010 Act understood ‘default’ to be the point when the debtor falls into arrears, however post Wilson, the prevailing view is that ‘default’ occurs later, following the expiry of the calling up notice. This interpretation was applied in Northern Rock (Asset Management) Plc v Millar and followed most recently in First Plus Financial Group PLC v Pervez.
While this definition of "default"’ affords the debtor an opportunity to avoid repossession immediately before proceedings are raised it also means that the only correspondence creditors are required to provide before "default" is the calling up notice.
There is no requirement for an accompanying explanation or notice of what remedial options are available. Without context a calling up notice could reasonably cause a debtor undue stress and alarm.
Commerciality v homelessness
Though the fulfilment of pre-action requirements and the need to obtain a court order don’t apply to solely commercial premises the 2010 Act still applies where land is “used to any extent for residential purposes” for example in hotels which offer living quarters for staff.
The principle underlying the Home Owner and Debtor Protection Act was, as its title suggests, to minimise the risk of home owners or debtors becoming homeless. However in buy-to-let situations the tenant living in the property is neither the home owner nor the debtor and the tenancy will subsist even if the landlord does obtain a court order to repossess the property.
For example if a borrower has a portfolio of 20 properties and falls into arrears the lender would have to serve 60 notices a calling up notice, notice to the property occupier and notices to the local authority for each property – as well as fulfilling the pre-action requirements and applying for a court order prior to exercise their rights under the securities, despite homelessness not even being a possibility.
Clearing the waters
While the courts have gone some way to reconcile the decision in Wilson with the 2010 Act the resulting state of Scots repossession law is unsatisfactory and in desperate need of reform for the sake of lenders and borrowers alike.
