Default position

“A Cadder for repossession proceedings.” The comparison serves to highlight the shock created by the Supreme Court decision, released on 24 November, in Royal Bank of Scotland plc v Wilson [2010] UKSC 50. It overturns the standard practice of most lenders in Scottish repossession proceedings of raising a writ founding on a “default” in terms of standard condition 9(1)(b) (of sched 3 to the Conveyancing and Fedual Reform (Scotland) Act 1970) and seeking recovery in terms of s 24 of the Act, by holding that the creditor must proceed by way of a calling-up notice.

The decision has already put at risk an unknown number of transactions for the sale of repossessed homes. The Law Society of Scotland’s initial advice to solicitors acting for purchasers is not to settle until selling creditors can either produce evidence of having followed the correct procedure or offer adequate title indemnity insurance.

The case arose from failures by two brothers, John and Francis Wilson, to keep up payments of business debts incurred to RBS in the 1990s. The debts were secured over their respective homes; these were jointly owned with their respective wives. The standard securities covered all debts owed to the bank by either spouse; the wives were unaware that their husbands had incurred these separate debts, and remained so unaware until the raising of court proceedings to enforce the securities.

In 1998, following demand letters addressed only to the brothers, and which did not specifically refer to the standard securities, the bank raised sheriff court actions craving warrant in terms of s 24(1) of the 1970 Act to enter into possession of the security subjects; and (as later amended) warrant for ejection of the defenders.

After an appeal to the Inner House on another point (2004 SC 153), the case went to proof before Sheriff Stoddart, who assoilzied the Wilsons on the basis that the bank had failed to serve the “formal requisition” required as a preliminary to ejection by the Heritable Securities (Scotland) Act 1894, s 5. Lords Nimmo Smith, Reed and Drummond Young in the Extra Division (2009 SLT 729) allowed the bank’s appeal, holding that warrant for ejection could competently be granted where the debtor in a standard security was in default in terms of standard condition 9(1)(b). The only voucher that was required was a certificate of default under sched 7 to the 1970 Act.

Act under scrutiny

Before the Supreme Court it was not even part of the appellants’ case that the previously accepted practice was wrong. They argued that the bank should have served a further document which could be regarded as a formal requisition before the actions were raised. It was the bank’s attempt to answer this point, said Lord Hope, “that led to the scrutiny of the provisions of Part II [of the 1970 Act] which has led in turn to the conclusion that the bank’s error can be traced back to their choice of remedy and to the conclusion, too, that the passage in Lord MacLean’s opinion in Bank of Scotland v Millward 1999 SLT 901, 903 on which the Extra Division relied to the effect that there was a choice of remedies was unsound”.

Counsel for the bank did not support the view that a notice of default constituted a formal requisition. As Lord Rodger put it, “A sched 7 certificate contains no requirement of any kind: it is simply a piece of evidence which is created for, and used in, the proceedings. It cannot therefore constitute the formal requisition which must precede the proceedings for ejection.” Instead, counsel argued that if the court granted warrant to exercise the remedies under standard condition 9(1)(a), the bank would be in the same position as if a calling-up notice had been served with which the Wilsons had not complied – which would constitute the necessary formal requisition.

Although accepting that both spouses knew what they had been asked to pay and had ample opportunity to put forward a defence, Lord Rodger said it would be “wrong to water down the precondition imposed by Parliament” for using the summary procedure of ejection. “In more concrete terms, if a formal notice had been given, Mrs Wilson would have been warned about the situation and about the danger of being ejected from her home before any proceedings were started. Which seems only reasonable.”

Calling-up essential

Lord Rodger then addressed the question of whether the bank had been bound to serve a calling-up notice in that situation. Overruling Millward, he held that a calling-up notice could be served in cases where the creditor had asked for payment of less than the whole debt; that a calling-up notice and a notice of default had different purposes and might be used separately or concurrently; and that, in a case falling within the scope of s 19(1), the creditor must serve a calling-up notice. “That interpretation ensures that all debtors are treated alike and, in particular, that they are all given the two-month period in which to pay that is specified in the calling-up notice.”

Lord Hope, concurring, said that although the predominant view taken in the textbooks was to view the Act as “providing the creditor with a basket of remedies and then providing him with the calling-up notice, the notice of default and the application to the sheriff court for a warrant as different routes by which they can be obtained”, the reference in standard condition 9(1)(b) to a failure to comply with any other requirement arising out of the security, had to mean defaults other than in respect of the debt secured by the standard security. “Content for its application is to be found in the requirements that are set out in standard condition 1 (maintenance and repair), standard condition 2 (completion of buildings), standard condition 3 (observance of conditions in title) and standard condition 5 (insurance), and any other similar conditions that may have been included by way of variation to maintain the value of the security subjects.”

The three English judges on the panel, Lord Walker, Lady Hale and Lord Clarke, also concurred. Lady Hale observed: “Who knows whether these wives had sums in their own bank accounts which might have enabled them to discharge these debts had they been told? It is sexist simply to assume that they did not.”

Sale doubts

It has been reported that only about 20% of the 8,000 or so repossessions that have taken place on average in Scotland in recent years have followed the calling-up notice procedure. Where a property has been resold and the purchaser has a registered title, the Keeper’s indemnity should protect a purchaser in possession, but the decision will throw into doubt many transfers that have not yet reached that stage.

Registers of Scotland have emphasised following the decision that the onus remains with solicitors to determine the effect, if any, of the judgment on the particular transaction they are involved in. If the solicitor is content that the statutory procedures have been complied with, an affirmative response to the power of sale compliance question in the relevant land registration application form should be provided. If the solicitor feels unable to supply an affirmative response, then, as in any other case where no affirmative response can be given, the Keeper will feel bound to exclude indemnity, opening up the potential for the register to be rectified if the disposition granted by the creditor is subsequently reduced.

Bruce Ritchie, Director of Professional Practice at the Law Society of Scotland, said: “The Society’s Conveyancing and Civil Justice Committees will be looking at this in detail, but our preliminary view on current sale transactions that have not yet settled is that buyers’ solicitors should be firm about declining to settle the transaction until they are satisfied that their clients’ position, including lenders for whom they are acting, is properly protected from challenge.”

For the defence

Govan Law Centre’s (GLC) principal solicitor, Mike Dailly, said the decision “may be to Scottish repossession proceedings what Cadder has been to criminal proceedings in Scotland”, and predicted it would “send shock waves” to lenders and their solicitors. “More than that, it could mean thousands of cases might have been raised incompetently, with defenders entitled to seek dismissal with expenses in principle. GLC would recommend that all homeowners in Scotland currently subject to repossession proceedings seek advice from a law centre solicitor or local firm of solicitors in light of this decision.”

Threatening legal action against lenders who passed the bill for dealing with the judgment on to his clients, Dailly added: “The question that no one has asked is ‘who’s going to pay for all this?’ I have no doubt UK banks will do what they always do and pass these costs onto consumers by adding them to their mortgage – which they can do if the costs are reasonable. We could be looking at up to £40 million or more. It’s not reasonable to expect vulnerable Scots facing repossession to pay banks and their lawyers twice for what is essentially their solicitors’ responsibility and failure.”

Others have predicted added strain on the court system as fresh proceedings have to be brought in many cases.

The full implications of the decision may take some time yet to unfold.