Homing instinct

You don’t have to be too old to remember the introduction of the Mortgage Rights (Scotland) Act 2001, heralded by many – including myself – as a landscape-changing piece of legislation, overturning the almost invincible position of the creditor in repossession actions. The 2001 Act did have some effect in altering the balance of power between lenders and their customers but, while no precise figures are available, it transpired that no more than 10% of repossession actions between 2002 and 2009 were the subject of a mortgage rights application.

In many cases, home owners were either unaware of the opportunity to make such an application or ignored their opportunity. In other cases, the formality and complexity of the process may have deterred applications under the 2001 Act.

The effectiveness of the Act was not a matter of political concern during the relatively benign economic conditions pertaining in the early and middle years of this decade. The current economic crisis, however, radically changed the political climate, and fuel was added to the fire by the introduction in England & Wales of the pre-action protocol for mortgage possession actions, which led to accusations that the Scottish Government was not affording the same protections to Scottish consumers as those enjoyed by their counterparts in England & Wales.

Anyone at home?

The Scottish Government gave the matter careful consideration and has now introduced the Home Owner and Debtor Protection (Scotland) Bill, likely to become an Act during the summer of 2010. The policy objectives of the bill are “to protect home owners and debtors during a period of recession”, but there is also a recognition that the measures will “continue to be appropriate in the event of an early recovery”.

Part 1 of the bill (part 2 deals with sequestration and trust deeds) changes the landscape in relation to repossession procedures by separating out procedures for the enforcement of securities over, on the one hand, subjects “used to any extent for residential purposes” and, on the other, wholly commercial subjects.

Mortgages and other securities in the first category will be subject to a whole raft of new legislation to be developed over the next six months. The enforcement of commercial securities will remain largely unchanged, and none of the changes set out below apply to bargains where there is no usage on a residential basis. The very first question creditors need to ask themselves in future is therefore “what are the security subjects being used for?”; but canny borrowers might consider moving into their warehouses or factories for a few nights to avail themselves of the new protections.

Pressure on the courts

Of the new concepts introduced for mortgage repossessions, the most important is surely the provision that all such cases will now require to call in court, whether or not the customer appears or is represented. The bill provides that residential claims in this area in future must be by way of summary application. Practitioners will have seen a great deal of discretion about substantive decision making under the 2001 Act, which the new bill preserves, but summary applications create the possibility of more discretion being exercised about procedure too.

The Scottish Government has been very clear about stating that it understands the need for adequate resourcing of the courts to deal with all the additional hearings that will occur. It seems likely that at least 10,000 new court hearings per annum will be required, and perhaps more depending on the attitude of the courts to granting multiple continuations. It may well be that in more rural courts, the business will be able to be accommodated within existing court rolls, but in more urban settings, it is to be hoped that sufficient resource will be provided to ensure that justice does not suffer from excessive delays.

Hoops for creditors

When the court does consider the creditor’s application for a repossession decree, it must in all cases consider whether the creditor has followed the new concept of statutory pre-action requirements, introduced by the bill. If it has not, the creditor will not be entitled to enforce the security. These requirements are to be fleshed out by secondary legislation but will include enforceable obligations such as that the customer should have been the subject of attempts to discuss the arrears, and that the creditor must not commence proceedings if the customer is likely to receive sufficient support from government, or under a mortgage protection policy, to make the proceedings inappropriate.

If the debtor appears or is represented, the court must consider the various matters currently relevant to a mortgage rights application, such as the nature and extent of the arrears and the extent to which the creditor has sought to assist their customer. The use of summary application procedure means that the possible options open to the court are virtually infinite, but multiple continuations and sists seem highly likely.

This is also a good place to note that yet another change the bill will achieve is the permission of representation in repossession proceedings by approved lay representatives, likely to include those working for the citizens advice bureaux, Shelter and similar organisations.

A further change is to introduce a class of potential parties to the action called “entitled residents”. These individuals, despite not having been called as defenders, may apply to the court to continue the proceedings or make any other order the court thinks fit, effectively seeking the same relief from the court as the mortgage customer is able to do if they choose. The definition of “entitled resident” is identical to the category of persons who are currently able to make an application under the 2001 Act and, as such, includes spouses, civil partners and certain specified others. The Scottish Government is currently consulting on whether – for the first time – this category of persons should be extended to include tenants, and early indications suggest that such a change may appear at stage 2 of the bill.

Improved protections?

Where a decree is granted, the bill seeks to permit a much more straightforward procedure to allow the debtor or an entitled resident to recall that decree. The 2001 Act caused a number of difficulties about reponing, and the new bill will probably result in an automatic recall procedure. As matters stand, only one recall application can be made and there is a time limit on applications of 14 days after a charge. It has been noted that this is actually more restrictive than the current law on reponing, which allows recall (though not of right) up until the point when the decree has been implemented. It is likely this will be changed before the bill becomes law.

Finally, as matters stand there is intended reform of voluntary surrender procedure, covering the situation where the customer wishes to hand back the property. The bill seeks to reinstate the pre-2001 position by allowing the period of notice in a calling-up notice to be reduced to nil, but makes the procedure to achieve that result very cumbersome, requiring that the customer and any entitled resident certify by affidavit that they do not occupy the subjects; that they are not aware of anyone else occupying the subjects; that they consent to the exercise by the creditor of its rights under the security; and that their consent is freely given and without coercion of any kind. The reaction from both the lending industry and law centres has been to question why the existing process needs changed at all, as it works well. If the current provisions remain, it is likely that most creditors will simply raise court proceedings rather than invoke this revised procedure.

In terms of practical effects, inevitably for creditors it will take them longer to obtain a decree as a hearing will be required in every case. Costs are also likely to rise, partly for the same reason and partly because of the need to prepare for the hearing in relation to pre-action requirements and so on.

The benefits, however, will be greater similarity with the processes in England & Wales, and reduced homelessness, which after all is the main point of the bill.

Same direction

Even when the new Act comes into force, this is likely to remain an area of legal flux. Lord Gill has recently recommended that all repossession actions be classed as housing cases and assigned to the district court. We await developments on that, but in the meantime, the Government is to be commended for the fact that the bill accords in many ways with the conclusions reached, quite separately, by Lord Gill’s review committee.

Mark Higgins is a member of Irwin Mitchell LLP