Reforming the law of standard securities

Securing debt against land is of great practical importance. It enables individuals to obtain loan finance to buy homes in which to live. Figures for 2017 from UK Finance show that mortgages allowed 365,000 first-time buyers to purchase a home in the UK. Finance secured on land is also crucial in the agricultural and commercial property sectors. In total in 2017-18, Registers of Scotland recorded more than 127,000 transactions involving security over heritable property.

It is over 50 years since the last significant review of Scottish law in this area. The Halliday Report of 1966 recommended that the then law should be simplified by the existing forms of heritable security being replaced by a standardised model. Four years later, the Conveyancing and Feudal Reform (Scotland) Act 1970 introduced the standard security. For the most part the reform was a very successful one, but as the years have gone on, problems with the legislation have become more apparent.

Difficulties with the current law

Several problems can be identified. First, aspects of the 1970 Act are unclear. The decision of the Supreme Court in Royal Bank of Scotland plc v Wilson [2010] UKSC 50 overturned 40 years of understanding of how standard securities can be enforced. Another example is how documentation requires to be framed to assign a standard security for all sums, following the controversial case of OneSavings Bank plc v Burns 2017 Hous LR 55 (but compare Shear v Clipper Holdings, Outer House, 26 May 2017, unreported).

Secondly, the legislation in places is over-complex. There are a plethora of different statutory forms in the schedules, which have been criticised as too fussy. During the legislative passage of the bill that became the 1970 Act, one MP (George Willis) said that the schedules were “worse than mathematical conundrums and pose problems greater than those involved in finding one’s way through a psychedelic labyrinth”. The amendments made to the 1970 Act by the Home Owner and Debtor Protection (Scotland) Act 2010 add to the complexity.

Thirdly, the law on heritable securities is not as accessible as it might be. While most of it is found in the 1970 Act, there are numerous provisions in other legislation, such as the Heritable Securities (Scotland) Act 1894.

Fourthly, the 1970 Act is now showing its age. It was prepared at a time before conveyancing work was divided into today’s residential, commercial and agricultural specialisms.

The Scottish Law Commission project

The Commission’s project on heritable securities commenced in 2018 and will be carried out in stages. The project deals with property law issues and with enforcement. It does not deal with the law of credit (for example, interest rates) or with regulation of mortgage providers.

The first discussion paper (Scot Law Com DP no 168) was published in June 2019. A second discussion paper dealing with enforcement is scheduled for late 2020, with a final report and draft bill expected in 2022 or 2023.

In essence the objective of the project is to review the 1970 Act. The Commission’s provisional view is that it should be replaced with new legislation. 

Overview of the 2019 discussion paper

As its name reveals, the discussion paper deals with issues prior to default. (Of course most securities are never actually enforced.) Ranking is also left over to the second discussion paper next year.

The discussion paper has 12 substantive chapters, and there are 61 questions or proposals. There are some general underlying themes, such as abolishing mandatory statutory forms and facilitating digital conveyancing.

General matters

The Commission proposes, in the interests of simplicity, that the standard security should remain the only form of heritable security which can be granted, but it invites comments from consultees on the detail of the provisions forbidding any other form. It proposes also that the name “standard security” should be retained. While unexciting, it is felt that the changes which would require to be made to documentation if another name were to be used would not be justifiable. The Commission also considers the position where the debtor and creditor in relation to the secured debt are not the same parties as the security granter and security holder, and proposes that the new legislation should facilitate such transactions.

Secured obligation

An important innovation of the standard security was to allow future monetary debts to be secured, and the Commission proposes that this should continue. 

The 1970 Act also enables obligations ad facta praestanda to be secured, but it is not clear how securities in respect of such obligations are enforced. Probably what is secured here is the damages claim for breach of such an obligation. The Commission consults on what the position should be in future on securing non-monetary obligations. It is conscious that there is support in the profession for making it easier to enforce option agreements and other non-monetary obligations more effectively against the successor of the current owner. A separate project is proposed on this.

Encumbered property

The Commission asks about the types of heritable property over which a standard security may be granted. Currently, the main cases are land itself and registered long leases. The discussion paper consults on reform of standard securities over standard securities.

Creation

Under the 1970 Act, a standard security document must either follow form A (personal obligation and grant of security) or form B (straight grant of security), found in sched 2. In practice, a hybrid form is often used. The Commission proposes that forms A and B are abolished and instead there are only statutory requirements as to the information which must be contained in the deed (such as the identification of the parties and encumbered property). Consultees are asked, however, whether it would be helpful to have a non-mandatory model form. 

As under the 1970 Act, a standard security would continue to be created by registration in the Land Register. Another issue considered by the discussion paper is the creation of servitudes in standard security deeds, where the current law is not entirely clear.

The standard conditions

Schedule 3 to the 1970 Act provides for a set of standard conditions that are incorporated into every standard security. The thinking behind these was that it would allow security documentation to be shorter. In practice, this has not worked. Almost all institutional lenders heavily vary these. But there is also a complexity issue here. Some of the standard conditions deal with enforcement and are not variable. Enforcement, however, is also regulated by substantive provisions within the 1970 Act. 

The Commission proposes that enforcement rules should no longer appear in standard conditions. It asks more widely, however, whether the current standard conditions should be replaced by a new set of default conditions which are freely variable, or whether there should merely be some key rules such as the debtor being required to look after and insure the property. The discussion paper also considers the subject of the interaction of standard securities with leases, a matter currently governed by standard condition 6, as well as their interaction with other real rights.

Assignation

In recent times, it has become increasingly common for portfolios of standard securities to be transferred. The assignation provisions in the 1970 Act are brief. Its drafters probably did not have such transactions in mind. Recent case law, mentioned above, has identified uncertainty in how the relevant documentation must be framed. There are also difficult policy issues in relation to the question of what debts an assigned all-sums standard security can cover. In particular, it may be asked whether it should be allowed to cover debts due to the assignee which predate the assignation.

Variation, restriction and extinction

The discussion paper proposes that there should no longer be mandatory statutory forms for the variation, restriction or discharge of a standard security. The Commission’s provisional view is that restriction (where the extent of the encumbered property is reduced) should be maintained as a form of transaction which is distinct from variation.

In relation to extinction, the discussion paper examines the provisions on redemption in the 1970 Act and concludes that these should be simplified. The Commission proposes repeal of s 11 of the Land Tenure Reform (Scotland) Act 1974, which restricts contracting out of the right to redeem in relation to private dwellinghouses and is inhibiting certain forms of property financing transactions.

The Commission asks whether there should be a “sunset rule” for heritable securities, whereby these would be extinguished (unless the registration is renewed) after a lengthy period such as 50 years. The rationale behind such a rule would be to declutter the register.

Older forms of heritable security

Although the 1970 Act requires heritable securities to be in the form of a standard security, it does not disturb those heritable securities which predate it. Despite the passage of time, some remain extant today. The Commission asks whether anything should actively be done to bring these to an end. A particular challenge is the old ex facie absolute disposition, the most common form of heritable security in the 1960s. This was a transfer rather than a true right in security and could not, for example, be extinguished after a certain period. The Commission’s provisional view therefore is that there should not be legislative intervention, but it seeks the views of consultees.

Next steps

Consultation on the discussion paper runs until the end of September. The Commission hopes to receive a good number of responses to assist it in its task of improving this important area of law.