Mortgage lender entitled to hold out for full payment, court rules

The Home Owner and Debtor Protection (Scotland) Act 2010, in its application to mortgage debtors, was designed to protect against unreasonable conduct by a creditor in recovering its full debt, but not to limit a creditor’s contractual entitlement to recover the full debt, nor to prevent steps designed to maximise the recovery, the Court of Session has ruled.

Lord Brodie, Lady Dorrian and Lord Malcolm in the Inner House gave this view of the Act in refusing an appeal by Mr & Mrs James Martin against decisions by the sheriff and sheriff principal at Kilmarnock to grant a repossession order in favour of Swift Advances plc due to mortgage arrears relating to their house.

Mr & Mrs Martin had borrowed £426,000 in 2007, secured over the house, but were now only receiving pension income and were unable to met the payments due. At the date of the proof the balance, with arrears, amounted to £638,000. There was a prior standard security, for an amount not disclosed to the court.

The issues before the sheriff were whether Swift had complied with the statutory pre-action requirements (Conveyancing and Feudal Reform (Scotland) Act 1970, s 24A, inserted by the 2010 Act), and whether it would be reasonable in all the circumstances to grant the orders sought (1970 Act, s 24(5)).

In lengthy pre-action correspondence the Martins' daughter and son in law had said they were prepared to buy the house on the basis of a surveyors' valuation of £350,000 (it had been valued at the time of the loan at £750,000). Among other things, Swift had wanted clarification of an issue over rights of access that was said to affect the value. Delays were caused by difficulties in obtaining title deeds and eventually Swift raised proceedings, despite the Martins' solicitor having suggested they would be “shooting themselves in the foot” by doing so.

The debtors challenged the proposition that it would always be reasonable for the creditor to seek to recover all of the debt. Here the proposal was to pay market value. A creditor who disputed the market value had to explain its position. If the creditor had no good reason to refuse a proposal, it could not raise court proceedings.

Regarding the first issue, Lord Malcolm, delivering the opinion of the court, said that nothing in s 24A, which includes a requirement to make reasonable efforts to agree proposals, “prevents court action if, after appropriate communications, it is clear that the debtor simply cannot comply with his obligations in full... The whole tenor of s 24A(3) and (4) is of discussions aimed at an alternative agreement whereby the debtor’s obligations can be fulfilled, for example, on the basis of a lower monthly payment extending over a longer period. There is nothing to suggest that a proposal to pay only a fraction of the sum due must be accepted, or that it can stop the raising of court proceedings”.

There was never any prospect of the debtors being able to put forward a realistic arrangement whereby their financial obligations could be fulfilled, and at no stage were Swift presented, nor could they have been, with a proposal which involved an alternative method of paying the debts in full. “What was done [by Swift in negotiations] far exceeded anything required to meet the needs of s 24A”, Lord Malcolm said. “It follows that there was no bar to the raising of the current court proceedings.”

As for reasonableness of raising the action, Swift had remained willing to obtain a new valuation if it could be given clear evidence on the true state of the titles. “It is understandable that Swift lost patience and resumed the court proceedings”, the judge continued. “The purpose was to allow Swift to test the market. In the circumstances there was no burden on Swift to prove that a sale would achieve a higher price than the [£350,000] valuation... there has been nothing untoward or unreasonable in the conduct of Swift. Indeed, they showed remarkable patience and tolerance, even when faced with somewhat intemperate correspondence.”

He added: “It might have been different if at any stage the debtors had offered to put the subjects on the market themselves. Given the lengthy history, and the amount of the outstanding monthly payments and principal sum, it is clear that the lenders are now entitled to obtain possession of the subjects and seek to achieve the best possible price by advertising on the open market.”

Click here to view the opinion.