News In Focus
8 September 2010
D&W warning over repossessions
New laws which will make it more difficult to repossess homes could add months onto the process of recovering distressed commercial property assets, according to law firm Dundas & Wilson.
The Home Owner and Debtor Protection (Scotland) Act 2010, which comes into force on 30 September, is intended to prevent mortgage providers from making vulnerable people homeless, by introducing new steps which need to be followed before court action can be raised. But according to Darina Kerr, partner in D&W's real estate team, the Act is so far-reaching it could also prevent lenders from enforcing securities over some commercial property assets.
In addition to homes owned by private individuals, included under the new legislation will be commercially-owned properties which are let as residential homes, as well as any commercial premises which include residential accommodation, such as flats above ground floor shops owned by the same debtor. A lender could also take security for example over a hotel with separate staff accommodation
Ms Kerr said that any property portfolio with a residential element could be affected by the new laws.
She commented: “In instances of default where lenders want to extract value from impaired assets, they usually wish to sell the properties quickly to reduce debt. This is typically achieved by one of two routes – the insolvency route, often through appointment of administrators who then sell the properties, or alternatively calling up the bank’s security which allows the bank to sell properties directly.
”These new laws will make the direct sale route much more difficult in all instances where secured properties include any residential element. Lenders will already be considering how they can factor this into their operations and avoid what could be very lengthy disputes."
Protections
After 30 September, court action will be necessary in virtually every case involving any form of residential property. Lenders will also have to show that debtors, whether private individuals or commercial entities, have had every chance and proper assistance to resolve the default before even applying for court action.
Ms Kerr said: “We don’t yet know how the courts will react to commercial entities who try to make use of protections that are primarily aimed at helping private individuals. However, we do know that lenders will need to take the same steps to repossess residential properties from commercial entities as they will when repossessing homes from private individuals. This is great news for defaulting borrowers who the lender would like to remove, but will add a whole new layer of time and expense for lenders.
“It is important to remember that this legislation has no impact on properties which are purely commercial and have no residential element, as current rules will still apply to these. The purpose of the new legislation is to protect indebted individuals at risk of having their homes repossessed.
“Given that repossessions are becoming more frequent as more borrowers fail to meet loan obligations, lenders will need to adapt to the new regime. They need to ensure that repossession remains a viable option for all classes of commercial property assets, not just those which are non-residential."