Since the Conveyancing and Feudal Reform (Scotland) Act 1970 (the 1970 Act) came into force, the only lawful means of creating a fixed security over land and buildings situated in Scotland is by way of a standard security. In addition to creating this form of security, the 1970 Act provides for the imposition of various typical conditions attaching to a standard security. To the extent that the 1970 Act allows, these conditions are frequently varied by creditors creating additional requirements to be complied with by the debtor. The remedies available to a creditor where a debtor fails to repay the debt secured by a standard security, and the procedures that require to be followed to exercise those remedies, are also contained within the 1970 Act.
For the past few decades creditors, legal practitioners and academics have considered the 1970 Act to offer a choice of procedures to be used where the creditor desires to secure its right to exercise its remedies under the 1970 Act. However, a recent landmark judgment from the Supreme Court has clarified this understanding to be incorrect and, save in the limited circumstances where the proprietor of the secured subjects is insolvent, rather than being a choice of procedure, where repayment of all or any part of the debt secured is sought, a calling-up notice must be served on the debtor in terms of s19 of the 1970 Act – which then allows the creditor to exercise its remedies under the standard security as a result of the debtor’s failure to repay as demanded.
The implications of this judgment are significant. It will certainly mean that many creditors and practitioners will have to alter the practice hitherto adopted when seeking to secure their or their clients’ rights as heritable creditor under a standard security, where the debtor is in arrears of monthly payments or refuses (or is unable) to repay the debt secured. There is a possibility that debtors facing repossession could seek to challenge the right of the creditor to continue that process where a calling-up notice has not been served. There is also potential for property transfers following use of a procedure other than a calling-up notice to be challenged.
ROYAL BANK OF SCOTLAND V WILSON & ANOR [2010]
On 24 November 2010, the Supreme Court issued its judgment in Wilson. This signalled the end of a litigation that had commenced in the Sheriff Court in Scotland and which had been rumbling on for some 12 years between the parties. The facts are simply stated. Francis John Wilson and his wife, Annette Wilson, granted a standard security over their residential property in favour of RBS for all sums due and to become due either jointly or individually. Mr Wilson’s brother (and business partner), John Patrick McCormack Wilson, and his wife, granted a security in the same terms. The business of the Wilsons ran into financial difficulties and, in accordance with a practice widely adopted by creditors, RBS issued a simple demand letter to each brother (but not to their respective wives) requiring repayment of all the sums that were due to it and that were secured by the respective standard securities. When payment was not forthcoming, RBS raised court proceedings under s24 of the 1970 Act on the grounds that, by failing to repay on demand, the debtors were in default in terms of standard condition 9(1)(b) of the standard security. RBS argued it was therefore entitled to warrant from the court to exercise all the powers of a heritable creditor on the debtor’s default, including the power to sell the security subjects. RBS also sought warrant to eject the debtors from the secured subjects in terms of s5 of the Heritable Securities (Scotland) Act 1894 (the 1894 Act).
Wilson, which made its way before the Supreme Court, concentrated on whether a ‘formal requisition’ for payment of the debt secured had been made by RBS. A formal requisition is a necessary pre-condition for warrant for ejection to be granted by the court in terms of s5 of the 1894 Act. The sheriff agreed with the debtors that neither the demand letter nor the certificate of indebtedness required under Schedule 7 of the 1970 Act constituted a ‘formal requisition’ of the secured debt and therefore ejection could not competently be granted in RBS’s favour. The Inner House disagreed with the sheriff, holding that all that was required for a formal requisition was the certificate of indebtedness under Schedule 7. Indeed, it is thought that the Inner House was influenced by the views expressed in the late Professor Halliday’s influential text, Conveyancing Law and Practice (2nd ed). When the case came before the Supreme Court, the Justices also examined the whole terms of Part II of the 1970 Act, with a view to determining the correct procedure for a creditor seeking repayment of the debt secured by a standard security. In so doing, particular attention was paid to the terms of ss19 and 21 of the 1970 Act, which provide for calling-up notices and default notices respectively.
Section 19 provides that where a creditor wishes repayment of the debt secured by a standard security, it ‘shall’ serve a calling-up notice. In Bank of Scotland v Millward [1999], the Inner House interpreted ‘shall’ as being permissive rather than mandatory, thereby confirming the long-held view that a creditor faced with a debtor who was in arrears of payments due in terms of the debt secured could choose to either serve a calling-up notice under s19, a default notice under s21 or to proceed to court under s24, seeking the court’s warrant for the creditor to exercise all of its remedies on a debtor’s default under the security. Sections 21 and 24 both refer to the debtor being in default in terms of standard condition 9(1)(b) – a default constituted by a failure to comply with any other requirement arising out of the security. Creditors, practitioners and academics held the view that a failure to pay sums on demand gave rise to a 9(1)(b) default, since non-payment amounted to a default arising out of the security, even if the obligations to make payment were contained in a separate document (such as a facility agreement). In those circumstances, many creditors wished to proceed straight to raising section 24 proceedings, principally because court proceedings would, in any event, be required if warrant to eject the occupier of the security subjects was required following expiry of a calling-up or default notice. It was, therefore, more efficient to seek warrant to exercise the remedies of heritable creditor and warrant to eject in the same proceedings.
The Supreme Court disagreed with the previously understood interpretation of ss19, 21 and 24 of the 1970 Act. ‘Shall’ in s19 was not permissive, but rather mandatory. Millward was overruled to that extent. The reference to ‘debt’ in s19 did not, as was previously understood, refer to the whole debt secured, but rather to all or any part of the debt secured. Therefore, where a creditor wished to secure repayment of the whole debt secured or simply only a part of it, such as the amount of any instalments by which the debtor was in arrears, a calling-up notice had to be served before the creditor could exercise its remedies under the security. The Supreme Court found support for its interpretation in s21, which allowed a default notice to be served only in relation to a failure to comply with any other requirement arising out of the security. The ‘other’ could, in the court’s view, only be a reference to an obligation within the security other than repayment of the debt. It followed that a default notice under s21 was only to be used where the debtor had failed to comply with other requirements of the security itself, such as failing to adhere to the standard conditions obliging the debtor to maintain and repair, or to insure, the secured subjects. A failure to repay sums following a demand letter was not, therefore, a failure to comply with any other requirement arising out of the security and such failure did not amount to a standard condition 9(1)(b) default. That being so, it was not competent to seek warrant from the court under s24 where a debtor had failed to repay sums due following a demand letter of the type issued to the Wilsons by RBS.
EFFECT OF THE JUDGMENT ON PRACTICE AND PROCEDURE
In the vast majority of cases, a creditor seeking to enforce its security will be doing so following a failure to repay the debt secured. Following Wilson, creditors will now have to ensure that a calling-up notice has first been served in accordance with ss19 and 20 of the 1970 Act. It is only when the period of notice has expired without payment that the debtor will be in default in terms of standard condition 9(1)(a) of the 1970 Act. Such default is the key by which the creditor opens the door to its various remedies, including entering into possession of the security subjects, granting leases and, ultimately, the sale of the security subjects.
Creditors and their legal advisers will need to ensure that calling-up notices are served in accordance with the 1970 Act. Particular care is urged to ensure that the calling-up notice complies in all respects with the 1970 Act’s requirements, including the need to ensure that the notice itself conforms with the relevant style provided in Schedule 6 of the 1970 Act. Care also needs to be taken when deciding on whom the notice is to be served. Additional requirements are imposed by the Home Owner and Debtor Protection (Scotland) Act 2010 (the 2010 Act), where the secured subjects are used to any extent for residential purposes.
EFFECT ON EXISTING REPOSSESSION PROCEEDINGS
In existing cases where a creditor has proceeded by way of default notice or section 24 proceedings for repayment of the debt, it will be necessary to consider the risks of continuing to exercise its powers as heritable creditor following the Supreme Court’s judgment. Many creditors may consider that the safest option would be to re-start the process and serve a calling-up notice under s19, rather than face the uncertainties associated with relying on the old procedure.
If a case is sufficiently advanced towards a sale, it may be possible for insurance to be obtained to protect and mitigate against a challenge to the title. Bearing in mind the technical nature of the problem, it may be doubted that many debtors would see merit in challenging a repossession if a creditor can simply re-start the process, albeit that debtors are nevertheless being encouraged to challenge the creditor’s rights by some within the legal profession. Each case will have to be looked at to assess the risk of a successful challenge by a debtor and whether or not the creditor should take further steps to pre-empt any such challenge.
In situations where a creditor is selling land under a power of sale, the solicitor acting for a purchaser will need to apply to the Keeper of the Registers of Scotland for the Disposition in favour of the purchaser to be registered. As part of that process, the purchaser’s solicitor will need to answer a question in the application form to confirm whether or not the correct statutory processes have been followed. If a calling-up notice has not been served, this question cannot now be answered affirmatively and the Keeper is likely to exclude indemnity for any title based on the use of the procedures affected by the Supreme Court’s decision. This leaves the risk of a future challenge to that title open, and could adversely affect the marketability of the property.
Any purchaser who is considering buying property that has been repossessed, or any creditor prepared to lend to such a purchaser, must therefore investigate precisely what processes have been followed. If the correct processes have not been followed they should act cautiously. If re-starting the process is not a practical option, another alternative may be to consider obtaining appropriate title indemnity insurance.
RESIDENTIAL PROPERTY
In addition to the issues raised by RBS v Wilson, where the secured property is used to any extent for residential purposes, the requirements of the 2010 Act must also be observed. The 2010 Act imposes obligations on the creditor, following the expiry of a calling-up notice, to comply with certain pre-action requirements, including providing reasonable assistance to the debtor to fulfil the obligations owed to the creditor and the provision of prescribed information. Ironically, in such cases, following expiry of the calling-up notice and compliance with the pre-action requirements, the creditor will have to raise proceedings under s24 for warrant to exercise its remedies of entering into possession and sale – unless, of course, the debtor voluntarily surrenders possession of the secured subjects.
CONCLUSION
The Supreme Court’s judgment in Wilson has turned decades of practice on its head, and will require creditors and legal practitioners to alter the practices that they adopt when seeking to enforce the creditor’s rights under the standard security. The calling-up procedure itself is deceptive in its apparent simplicity and care must be taken to ensure that the statutory processes are followed to the letter if a challenge is to be avoided. In addition, the requirements of the 2010 Act impose onerous additional obligations on creditors seeking to repossess property that is used to any extent for residential purposes.
The current economic climate has led to repossessions running at around 8,000 per annum. It remains to be seen what effect Wilson and the 2010 Act will have in relation to these numbers, but it is clear that the procedures that now need to be adopted will do nothing to reduce the delays that creditors presently experience in seeking to complete the process of sale and recover sums due to them. Several lenders have, for this reason, petitioned the Scottish government for urgent legislative reform to address the issues raised.