Tide runs for lenders

In the spring of 2017, a decision by a sheriff from Banff Sheriff Court on the transfer of mortgage assets (standard securities) between OneSavings Bank and JP Morgan sent a ripple of concern across the mortgage industry.

Husband and wife borrowers, Mr and Mrs Burns, who were aware their mortgage had been acquired by OneSavings Bank, had gone into arrears. As a result, the bank required to take the couple to court in a residential mortgage repossession case.

However, in an unexpected turn of events, the sheriff found that the pursuer had no title to sue the borrowers: OneSavings Bank v Burns [2017] SC BAN 20.

The basis of the decision was that he did not recognise OneSavings Bank as being the rightful assignee of the mortgage it had purchased as part of a portfolio transfer from JP Morgan.

The defenders and their lawyers won the case, arguing that the specific terminology used during the transfer of the standard securities did not adhere to the particular form prescribed by the Conveyancing and Feudal Reform (Scotland) Act 1970. In particular, the sheriff found that OneSavings Bank’s assignation failed to specify the exact sum of money outstanding at the date of the transfer and was therefore invalid.

While the sheriff stressed that he found the couple liable to pay the mortgage debt back to OneSavings Bank, the property would not be able to be repossessed since the assignation did not meet the necessary legal requirements to recognise OneSavings Bank as the rightful assignee. This gave OneSavings Bank no title to seek a warrant to sell Mr and Mrs Burns’s home.

The decision came as a shock for the industry, and the ripple effect was felt by lenders who had purchased standard securities using the very same terminology that had been rejected in OneSavings Bank v Burns. As a result, many lenders were left questioning the validity of their mortgage portfolio purchases.

Serious breach?

However, reassuringly for lenders, the case of Shear v Clipper Holdings, 26 May 2017, a decision by Lord Bannatyne, gave them some hope.

Shear, the pursuer, had granted a security over a substantial commercial property. He was in significant arrears on his loan. He maintained that the assignation of the standard security to Clipper Holdings was invalid, relying on the same argument as had been put forward in OneSavings Bank.

The pursuer argued that the format set out in the 1970 Act should be considered mandatory, and any failure to follow it exactly was fatal and meant the standard security was not effectively transferred to the defenders, Clipper Holdings.

Lord Bannatyne’s judgment, however, was that the courts have, in recent times, adopted a more flexible approach and that a failure to follow statutory procedure does not automatically result in invalidity. Lord Bannatyne exercised fairness and commercial sense in this case, and ruled that the question at issue was the seriousness of the breach.

He considered that the failure to put the exact form of words into the assignation could not be categorised as a serious breach, and expressed the view that it would be unjust to rule in favour of invalidity. If the breach in question led to invalidity, “a sensible result would be wholly frustrated”.

In the result, Lord Bannatyne held that the pursuer was doing “nothing more than relying on a technicality to delay payment” – a delaying tactic. Even more importantly, Lord Bannatyne stated expressly that he disagreed with the decision in OneSavings Bank.

Given the opposing views in these two cases on the legalities surrounding the assignation of standard securities, it was no surprise that uncertainty continued in the market, questioning how the courts would deal with similar cases in the future.

Further support

Two more recent cases indicate that OneSavings Bank may have been a rogue judgment. In Promontoria (Henrico) Ltd v The Firm of Portico Holdings (Scotland) [2018] SC GRE 5, Sheriff Hamilton ruled, unlike Sheriff Mann, that the wording used in the assignation was as close as possible to the required form of words in the circumstances and where an “all sums due” security was concerned.

As a result, the requirements of the 1970 Act were met, meaning the assignation was valid. The sheriff, encouragingly for lenders, went on to note that, had he decided otherwise, he would still have followed the approach of Lord Bannatyne in the Shear case and would have concluded that the omission of the sum outstanding at the date of transfer was not a serious enough breach to be fatal to the validity of the assignation.

The decision provides further, welcome clarification in this area of law. The same decision has also now been reached in a recent decision from Edinburgh Sheriff Court, Clipper Holding II SARL v SF and SFX (Sheriff Holligan, 18 January 2018). This decision is currently under appeal, but is another example of how failure to specify the sum due in an assignation of a security was not fatal to its validity.

Combined with the decision of Lord Bannatyne in Shear, these cases are demonstrating a clear direction of travel away from the anomaly of Sheriff Mann’s ruling. It now appears that OneSavings Bank v Burns will go down in history as a one-off decision not to be followed in the future.