Commission tackles challenging issues in securities law

Should securities over land be able to be used for obligations other than the payment of money? That is one of the questions posed by the Scottish Law Commission in its third and final discussion paper on the reform of such securities, published today.

The paper explores two complex issues arising in this area of law: heritable securities in respect of non-monetary obligations, and sub-security arrangements – where a security is taken over a security. 

The paper acknowledges that granting a security in respect of a non-monetary obligation is a common occurrence in particular types of property transaction, for example a landowner agreeing to sell their land under an option agreement. However it states that confusion arises as to how a heritable security operates to enforce performance of such an obligation when, in reality, the security can only be used as a means of extracting money from the secured asset. 

As a result it invites views on whether a standard security should (i) no longer be capable of securing a non-monetary obligation, but may secure substitutionary monetary claims; or (ii) be capable of securing a non-monetary obligation, but with the security holder only entitled to damages on default?

A possible alternative to the present law would be a new scheme for protecting contractual obligations to transfer land, which the paper terms a conditional advance notice scheme. This would protect the priority of deeds due for delivery typically months or years after an obligation had been agreed, provided the conditions agreed between the parties have been fulfilled. 

With sub-security arrangements, the Commission recognises that their creation is viewed as an important step in high-value securitisation and debt warehousing transactions in the commercial finance sector. However questions arise over the conceptual soundness and practical utility of this approach, as the primary security has no market value independent of the claim it secures. The paper seeks views on whether the competence of standard securities over standard securities should be discontinued.

It then considers whether it should be possible for a standard security to be assigned in security, which is not competent at present under the 1970 Act. However the Moveable Transactions (Scotland) Act 2023 sets in statute the general principle that accessory security rights follow the claim to payment which they secure, so that the assignee of a claim to payment is also entitled to acquire any right in security held in respect of that claim. The paper addresses the issue of how this might operate in relation to a standard security, and asks whether it should be possible and, if so, what consequences should flow from this.  

The Commission says that while the general ethos of the project is to aim for “evolution, not revolution” in the law, its provisional proposals are designed to achieve "substantial improvements across these two technically challenging areas". 

Professor Frankie McCarthy, the lead commissioner on the project, commented: "The discussion paper necessarily covers a lot of technical legal detail. It puts forward proposals to resolve ambiguities in the current law which might be seen to hamper the kind of transactions under consideration taking place in Scotland. Importantly, the paper proposes a new scheme to protect contractual obligations to transfer land. This is something that has been called for by practitioners from the outset of the project. I look forward to hearing from consultees on the questions set out in the paper."

Access the paper here. The Commission is very keen to hear from everyone with an interest in the issues raised. Comments can be made until 29 September 2023.