A year in mortgage recoveries, and oh what a year!
A look at the turbulence in the law in this area over the past year, and the recent Scottish Government consultation exercise
Many people reflect back on a year when the bells strike on Hogmanay. The bells struck though in mortgage recoveries on 30 September 2010. This time last year saw the introduction of the Home Owner and Debtor Protection (Scotland) Act 2010. This was introduced by the Scottish Government to recognise the financial crisis facing the country and to bring Scottish borrowers in line with the remainder of the UK.
(a) all Scottish repossession cases having an automatic hearing;
(b) lenders demonstrating PAR compliant and considering alternatives to repossessions;
(c) homeowners being able to choose to be represented by approved lay representatives.
The pre-action requirements for lenders are set down as:
providing clear information about the terms of the security and amounts due;
making reasonable efforts to agree proposals with the debtor for future payments;
refraining from taking court action if payments by the debtor are likely to settle the sums due within a reasonable time;
providing information about sources of advice and assistance;
encouraging debtors to seek assistance, including from their local authority.
Most UK lenders already complied with most if not all of these requirements, but the Act did require certain tweaks to ensure they meet the specific Scottish requirements.
The largest area of difference between Scotland and England, though, still lies in voluntary surrenders, for surrender of any property used to any extent for residential purposes requires expiry of a calling-up notice. A lender will only be entitled to sell in those circumstances where:
(a) warrant of court is obtained; or
(b) the new voluntary surrender conditions are satisfied, being that the subjects are unoccupied; each of the new class of entitled residents has confirmed in writing that they do not occupy the subjects and they are not aware of anyone else being in occupation; that they consent to the creditor exercising its rights etc;
(c) the borrower signs freely and with consent.
This does not bring Scotland in line with England, where a borrower can surrender his property by simply handing in his keys. It means there are delays where it would be in all parties’ interests to have a speedy process.
It also raises complications of abandoned properties, with properties lying empty whilst lenders try to secure the property by way of a court order, and having to refuse relinquishment by secondary lenders wishing to surrender to first lenders. In these cases the risk averse approach of many lenders is to obtain a court order.
This saw the first court hearings under the new Act. It became apparent that the judiciary were aware of the onus on them, and pleased at the work put in by the lenders regarding the pre-action checklists. The first initial hearings indicated that sheriffs were willing to listen to both sides in establishing what was fair and reasonable.
Just as matters were starting to bed down with the initial court hearings, we saw the issue of the judgment in the case of Royal Bank of Scotland v Wilson  UKSC 50. This Supreme Court decision overturned the standard practice of most secured lenders in Scottish repossession proceedings of raising a writ founding on default, and overturned an appeal decision of the Court of Session. In the past 40 years it had always been held that there were three ways in which lenders could take possession of real property and sell or lease it in order to recover the balance of their loan, namely:
(a) by serving a calling-up notice;
(b) by serving a default notice; or
(c) by raising a court action under s24 of the Conveyancing and Feudal Reform Scotland Act 1970.
But according to the judges in this case there is and always has been only one way – by serving a calling-up notice! As a result, lenders were left with hundreds of Scottish properties on their books and court orders that could be subject to challenge.
This saw lenders and their solicitors liaise to produce an effective pragmatic solution to this matter. Calling-up notices were issued on all live cases and sales were usually effected by utilising defective title indemnities. All live court actions were dismissed, usually on a no expenses to or by basis. There are lingering problems mainly in regard to the Keeper’s decision to leave second charges still on the register.
This saw the expiry of these new calling-up notices, and the redrafted summary cause applications being lodged with the courts.
At the same time the Scottish Government was reviewing the protection available to tenants to try and bring them also in line with England & Wales and the review that had been conducted there. This concluded that Scottish tenants already enjoyed greater protection than in England & Wales. The Mortgage Repossessions (Protection of Tenants) Act 2010 merely codifies and reiterates the court case of Tamroui v Clydesdale Bank 1997 SLT 20. This is the court case that reserved the right of a tenant to separate court proceedings under the Housing (Scotland) Act where appropriate.
The first hearing dates after expiry of calling-up notices are issued. The initial feedback is that sheriffs are aware of the duty to consider "fair and reasonable" even if the defender does not appear at the first hearing. Their focus has been on whether the lenders are PAR compliant. They are concerned to ensure that the borrower has been properly served and is aware of the hearing date. This has led to them favouring newspaper advertisement over walls of court, albeit a more expensive option where a defender has shown little or no sign of interest in defending. They are alert, though, where a borrower makes an arrangement, to explain to the borrower that it is very much a last resort. The point for a bank’s solicitors is to know your case and be aware of the level of arrears, months missed, contact made, occupancy and valuation of the property.
A word of warning to defenders' solicitors: despite the introduction and amendments made in 2010, some defenders' solicitors are still lodging mortgage rights applications. These were abolished and the correct format is to lodge answers to the summary application.
In Scotland there was no legal requirement to serve a charge prior to eviction where the creditor had already obtained a decree or warrant for the ejection of the defender, or an occupant which the defender had allowed to occupy the heritable property. This included where decrees or warrants for ejection against defenders were obtained under the Conveyancing and Feudal Reform (Scotland) Act 1970, as well as against tenants under the Housing (Scotland) Act 1988.
However since 4 April 2011 we must serve a charge, with at least 14 days' notice, and this must expire, before we proceed with eviction to remove either the defender, occupant or any of their effects.
The legislation (the Bankruptcy and Diligence (Scotland) Act 2007) also states in s 216(3) that the judicial officer removing the defender/occupant etc must make an inventory of any effects which are removed. The judicial officer will be the sheriff officer carrying out the eviction, so whilst contractors can take a note, the legislation requires the sheriff officers to make a formal inventory themselves. This may cover circumstances where there are pets/animals in the property.
There is therefore no practical issue with this new legislation, just an added requirement imposed on lenders seeking recovery of heritable property which gives rise to some additional costs.
The Scottish Government issued a report in July 2011 analysing the responses to their informal consultation on the implications of the Supreme Court judgment in Royal Bank of Scotland v Wilson.
The consultation sought views on introducing legislation to return the process to that which was standard practice before the judgment, and also non-legislative changes to mitigate the issues resulting from the judgment.
The paper put forward the following areas for consultation:
- implications of the judgment;
- implications for borrowers, lenders and purchasers;
- views on mitigating action.
Many respondents to the consultation felt that there were negative long-term implications from the judgment. They were concerned that the judgment would result in an additional two months' delay (as a minimum) and bring additional costs as a result of the required calling-up notice. Some respondents were concerned that the extended timescales and costs come at a time when the introduction of the Home Owner and Debtor Protection (Scotland) Act 2010 is already having similar effects. There were also concerns that the judgment impacts on lender confidence and puts the mortgage market in Scotland at a disadvantage to the rest of the UK.
In relation to the implications for borrowers, the most frequent comment was that they would have to incur additional costs. Several respondents noted the fact that interest will accrue on debts during the two month calling-up notice period. A more significant concern was the award of legal costs being made against the borrower. This was considered a particular issue where a second action has had to be raised due to RBS v Wilson. In terms of implications for lenders, there were concerns about delays in the process, additional costs and potentially increased losses on the property being repossessed. The main comments in relation to purchasers of repossessed properties were that, for current and future purchasers, there will be the additional expense of having to pay for title indemnity insurance. However, others argued that this is only an issue where procedures have not been adhered to and will not be a major concern in future.
A large majority felt that there were negative impacts from the judgment that the Scottish Government should seek to rectify. A key concern was that the judgment overturns established practice and what had been the understanding of the law. Some consultees called for the Scottish Government to provide guidance to deal with current uncertainty. A majority of respondents agreed that the Scottish Government should introduce legislation to return the repossession process to the position prior to the judgment. Some felt that legislation may be required to clarify the requirements of the 2010 Act.
Some argued that the Scottish Government should avoid taking a piecemeal approach to legislating on the issue and should comprehensively review the law in relation to repossessions. Consultees proposed non-legislative action that could mitigate negative impacts from the judgment. These included better guidance on a range of issues, publicity and better communication between the mortgage industry and the advice sector. Some felt that there will be greater clarity on issues arising from the judgment when further case law is available.
There were a number of additional comments made to the consultation. These mainly related to the interaction between the RBS v Wilson judgment and the requirements of the 2010 Act – and the potential for confusion and duplication. There were also comments stressing the need for a swift resolution of the issues raised by the judgment.
Having considered the implications, and whilst a number of the responses showed that there was a preference for legislative change, the Scottish Government has decided not to introduce further legislation at this time to return to the standard practice prior to the judgment.
The Scottish Law Commission plans to review this area of law as part of its 2010-2014 Programme of Law Reform, and the Government considers it prudent to await the outcome of the review, which may result in wider reform in the future.
Whilst it is unfortunate that an ideal solution for all parties has not been found, the calling-up procedure will continue to apply for the present.
On a more positive note, an area which until now was largely unregulated is all due to change when the Property Factors (Scotland) Act 2011 comes into force on 1 October 2012. The main aims of the new Act will be to create a registration process for all property managers currently in operation in Scotland and a code of conduct for them to adhere to. This can only be good news for repossession lenders, who have faced questionable accounts from certain property managers, with no speedy dispute resolution forum.
It will be interesting to see if 2012 brings as many developments in an area of law that largely had remained untouched until the Mortgage Rights Act of 2003.
Myra Scott, Partner, Recoveries, Irwin Mitchell Scotland LLP