Security of your home

The landscape of mortgage repossession procedure in Scotland has dramatically changed in recent years. 2010 saw the introduction of the Home Owner and Debtor Protection (Scotland) Act 2010, as well as the crucial decision of the UK Supreme Court in Royal Bank of Scotland v Wilson [2010] UKSC 50.

The 2010 Act amended the legislative framework by strengthening the rights of home owners in repossession proceedings. It stipulates that all such cases must call in court. It sets down matters which a sheriff must have regard to, where a defence is stated. These include the reasons for the default, the likelihood of the debtor fulfilling their obligations under the security within a reasonable time, any action taken by the lender to allow the debtor to fulfil these obligations, whether the debtor is taking part in a debt arrangement scheme, and whether the debtor and other residents will be able to source alternative accommodation on repossession.

Another significant element of the Act was the introduction of pre-action requirements (PAR), through amendments to the Heritable Securities (Scotland) Act 1894 and the Conveyancing and Feudal Reform (Scotland) Act 1970. The PAR (see panel) place responsibilities on lenders to carry out certain actions prior to commencing proceedings against a home owner, thereby requiring lenders to demonstrate that they have considered reasonable alternatives to legal action.

A lender is only entitled to commence court action if they have complied with these requirements. Accordingly, lenders have to provide evidence of PAR compliance in a Form 11C, which should be lodged with the court. If a lender does not provide satisfactory documentation, the action may be rendered incompetent.

In November 2010, the Supreme Court in Wilson determined that calling-up notices are required in all cases where lenders seek to instigate repossession proceedings for mortgage arrears. This means that prior to raising an action, a document giving two months’ notice to the borrower to repay the whole sum outstanding, including arrears, must be served. The court held that a lender’s letter of default in this case did not satisfy the requirements of the 1894 Act.

This decision was revolutionary in clarifying the rights of debtors subject to repossession proceedings. Previously, most lenders would raise court actions on the basis of “certificates of default”, which specified the amount of arrears accrued. The impact on proceedings pending at the time was substantial, with many actions being dismissed as incompetent.

In Wilson’s wake

After Wilson, further matters required to be considered in repossession cases. These came before Sheriff Deutsch at Glasgow in Royal Bank of Scotland v McConnell; Northern Rock (Asset Management) v Millar (“Millar”), 28 February 2012.

These cases focused on the question of when a creditor is required to comply with the PAR in terms of the Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010. In order to answer this question, Sheriff Deutsch first had to consider when a debtor was considered to have entered into “default”.

With Wilson having already settled that a calling-up notice was required before a creditor could raise court proceedings, in Millar, Sheriff Deutsch ruled that “default” was the point when the calling-up notice expired, and not the point when the debtor first went into arrears. A creditor required to provide the PAR-prescribed information should do so at the point of default, which meant after the two-month period of the calling-up notice and prior to court proceedings being raised.

Prior to Millar, many lenders had been sending the prescribed information at the point when the debtor first went into arrears with their mortgage, and well before the calling-up notice had expired. The decision gave rise to a second wave of repossession cases that required to be dismissed on competency grounds. Its significance was that it gave further hope to home owners, allowing them a further opportunity to try to resolve matters, avoiding court proceedings and expenses. In addition, it helped highlight to lenders the importance of complying with the PAR.

Separate appeals by the respective pursuers to the Inner House were abandoned or dismissed without reaching a hearing.

More on Millar

The decision in Millar was unsuccessfully challenged in five separate mortgage repossession actions: Northern Rock (Asset Management) plc v Doyle etc (“Doyle”), 2012 Hous LR 96. These were heard simultaneously, again by Sheriff Deutsch in Glasgow.

The pursuers’ solicitors put forward a number of arguments in an attempt to challenge the decision in Millar, which were all rejected by the sheriff. He reaffirmed that “default” was at the point when the calling-up notice expired, and that the information prescribed by s 24A of the 1970 Act, s 5B of the 1894 Act and the 2010 Order was to be provided following this default.

The defenders’ solicitors advanced a competency argument: that the pursuers had not complied with the PAR in letters sent to the defenders following expiry of the calling-up notices. Sheriff Deutsch held that two of the letters were compliant, but that in three cases, not all the information required had been provided following the default, and these actions were dismissed as incompetent.

The particular omission was in relation to information about the level of any charges that might be incurred by virtue of the contract to which the security related. The letters in question had included a bald statement informing the defenders that they would be liable for “all costs and any arrears charges under the terms of your mortgage agreement that results from the default”. However, the specific level of these possible charges was not stated, as required by para 2(a) of the 2010 Order.

Doyle discussed

The Doyle judgment proved helpful to lenders and borrowers in clarifying what is specifically required to satisfy the 2010 Order, and resulted in further sheriff court actions being dismissed as incompetent.

In a decision of Sheriff Bicket in Accord Mortgages v Dickson, Hamilton Sheriff Court, 6 July 2012, a different approach was taken to that of Sheriff Deutsch. The pursuers’ solicitors submitted that, based on the legislative context in which it appeared, “default” was a reference to a contractual default, specifically in making monthly loan payments timeously. The 1894 Act and the 1970 Act did not define default, and the Interpretation and Legislative Reform (Scotland) Act 2010 applied to the 2010 Order as a Scottish instrument. In order to ascertain “default”, we had to look at the 2010 [Home Owner] Act, not the 1894 or 1970 Act.

The 2010 Act contained no definition of “default”, but aimed to deal with difficulties as soon as they arose, given that the PAR had to be followed “as soon as is reasonably practicable upon entering into default”. Sheriff Bicket agreed that “default” should be construed by reference to that Act, and arose once the debtor was in arrears. The 2010 Interpretation Act applied, and made a difference to the interpretation of “default”. Because of that, it was not necessary to await the expiry of the calling-up notice for the debtor to be in default.

But in a further decision, Firstplus Financial Group v Pervez, Glasgow Sheriff Court, 22 March 2013, Sheriff Reid preferred the approach taken in Doyle and rejected the rationale of Dickson. His view was that the Interpretation Act 1978, rather than the 2010 Interpretation Act, applied to the 2010 Order. The Order was made “in exercise of the powers conferred by” the 1894 and 1970 Acts, and the meaning of “default” was the same as in both of these enactments; the Order did not create an autonomous meaning. Accordingly, the action was incompetent and was dismissed.

Benefits of clarification

The effect of the foregoing cases and legislation should be greater protection for those facing repossession. Lenders require to serve calling-up notices, comply with the PAR and notify the relevant local authority of impending court actions; repossession actions require to call in court; and sheriffs require to consider the appropriate factors to determine reasonableness. Challenges to the competency have brought clarity as to when borrowers are in legal “default”, to what information should be given by lenders, and to the time for complying with the PAR.

The approach taken by sheriffs in Glasgow, where many of the challenges have been raised, has demonstrated a willingness to adhere to this legislative intent of protecting the borrower, not only by upholding challenges to competency, but also in relation to the onus placed on a sheriff to consider reasonableness.

A recent decision by Sheriff Principal Bowen QC, Bank of Scotland v Gallacher, Glasgow Sheriff Court, April 2013, held that where a defender is represented, the court must have regard to the factors in s 24(5)(e) of the 1970 Act when determining the reasonableness of granting an order, and not merely “pay lip service” to them.

Challenges to repossession actions have been criticised as being counterproductive for both lenders and borrowers, on the basis that they discourage co-operation. This criticism is unduly harsh. Those of us who represent borrowers would never discourage our clients from positively engaging with their lenders to try to reach an appropriate conclusion. Indeed, in many cases where actions have been dismissed on competency grounds, work has been undertaken to try to prevent new actions being raised, through obtaining access to appropriate money advice, use of the Mortgage to Rent Scheme, or helping clients obtain assistance with mortgage interest payments from the DWP or take appropriate steps to market their properties.

Challenges to the interpretation of legislation must continue to be made, in order that the law relating to repossession becomes clear and adheres to the legislative intent of providing assistance to those in danger of losing their homes.

Competency challenges have also been criticised as increasing lenders’ costs of litigation, perhaps necessitating higher interest rates in Scotland. Clarification of the law should not increase litigation costs but diminish them as the law becomes settled. It is certainly not lenders who currently bear the costs: borrowers often face the spectre of “double charging” or “triple charging”, where the costs of previous incompetent actions are added to their accounts unless challenged.

It is hoped that courts will continue to welcome challenges to ensure that the legislative intent of the 2010 Act is upheld at a time when many people are facing financial instability.

Making PAR

Under the statutory pre-action requirements (PAR), lenders must:

1. Provide a homeowner with clear information about the terms of the loan, and the total amount due, inclusive of any charges pertaining to late payment or early repayment. Additionally the lender must provide the debtor with clear information about any other debt owed to them.
2. Make reasonable efforts to agree a repayment plan with the debtor.
3. Not commence court proceedings for repossession if the debtor is taking action to clear their arrears or outstanding loan balance within a reasonable time; and
4. Provide the debtor with information on how to obtain advice about their debt management problems.