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Changes on the cards for Scottish repossession law

The introduction of the Home Owner and Debtor Protection (Scotland) Act 2010 will result in some significant changes for Scottish repossessions. Mark Higgins of Irwin Mitchell LLP explains

 

Those of us who can remember the days when Scotland was very lender-friendly, prior to 2001, Scottish courts had no discretion whether to grant decree (a possession order) in favour of the lender where the customer accepted he was in arrears. Since then, we have had to accept mortgage rights applications, however, these only apply to a small percentage of cases where the customer or his family come forward.

 

The Scottish possession landscape is about to undergo yet another radical change with the introduction of the Home Owner and Debtor Protection (Scotland) Act 2010. The Bill will soon be completing its journey through the Scottish Parliament and is likely to come into force in June or July of this year and will apply where the property is used to any extent for residential purposes.

 

The policy objectives of the Bill are stated to be “to protect home owners and debtors during a period of recession” but with a view that its “measures would continue to be appropriate in the event of an early recovery”. In contrast with the (now all too distant) former position in Scotland, the new Act will provide Scottish customers with as much, if not more, protection as in England & Wales.

 

 

A high level overview of the 2010 Act

The 2010 Act approaches the reform of Scottish possession law in two ways. Firstly, it repeals almost all of the Mortgage Rights (Scotland) Act 2001 and seeks to restate much of its terms.

 

Secondly, it introduces a number of brand new concepts, such as all cases calling in court, lay representation being permitted, automatic recall of decree provisions and pre-action requirements being imposed on lenders. Each of these bears a little further consideration but another important aspect must be considered first.

 

 

Voluntary surrenders and court orders

As arrears managers will know, the Scottish system has permitted sale of the repossessed property following expiry of a calling-up notice or notice of default, though it has always been necessary to raise a court action to evict the customer where that is required.

 

The new Act will eliminate this unless the rigorous procedures around voluntary surrenders have been followed. If they have not, a court order is the only way in which a lender will be permitted to exercise its powers under the security. The relevance of calling-up is therefore effectively eliminated in the residential context, other than for voluntary surrenders.

 

In regards to voluntary surrenders, the lender may only proceed with a surrender where the property is unoccupied; and each of the customer and the entitled residents (discussed below, but essentially the people currently entitled to make a mortgage rights application) has, in writing certified:

• that they do not occupy the property and are not aware of the property being occupied by any other person;
• that they have consented to the exercise by the lender of its rights; and

• they have certified that the consent is given freely and without coercion of any kind.

 

The government has listened to lenders and their representatives and recently removed a requirement for sworn affidavits, but the procedure for written certifications remains cumbersome and it is likely – given the risk of missing a required signature (an ex-partner for example) -  that many lenders will simply issue court proceedings on all cases.

 

Pre-action requirements

The 2010 Act also requires that lenders must have taken a number of steps before commencing proceedings. These are set out in the Act, in general terms, and are likely to be the subject of detail corresponding to the protocol, in a statutory instrument still to be issued.

 

The Act will provide:

1. The lender must provide the debtor with clear information about the terms of the security, the amount due to the lender under the security, including any arrears and any charges in respect of late payment or redemption and any other obligation under the standard security in respect of which the customer is in default.
2. The lender must make reasonable efforts to agree repayment proposals with the customer.
3. The lender must not make an application to court if the customer is taking steps which are likely to result in the payment to the lender within a reasonable time of any arrears, or the whole amount, due to the lender under the security.

4. The lender must provide the debtor with information about sources of advice and assistance in relation to management of debt.

 

As regards the above detail, substantial representations have been made to the government that the terms of the pre-action requirements should be as close as possible to the terms of the pre-action protocol in England & Wales, not least because lenders routinely follow the protocol in relation to all cases, even where they are Scottish.

 

There are obvious similarities with the protocol in the terms above, particularly regarding subjects such as timescales before issuing proceedings, and when it is reasonable for a lender to rely on a customer selling their property - or claiming under a mortgage payment protection policy - that the current debate is centring.

 

The draft statutory instrument which will contain details of the pre-action requirements is expected next month and, at this stage, lenders who operate sensible procedures and apply the protocol across the UK should not have too much to fear, though some tweaks will inevitably be necessary.

 

All cases must call in court

Perhaps the biggest change of all is that the 2010 Act will require that all residential possession cases must be issued as “summary applications”, a form of procedure different to that used presently. The reason for this approach is to ensure that all cases call in court and in that respect, the new Scottish system will be very similar to the approach in England & Wales.

 

The rules around this form of procedure require the sheriff (judge) to “summarily dispose of the matter and give his judgment in writing”. It seems likely that there will be a number of continuations in many cases and – as with the mortgage rights system – considerable variability about the procedure applied by different courts.

 

In deciding the lender’s action, the court must in all cases look at whether the lender has fulfilled the pre-action requirements and also whether it is reasonable to grant decree, having regarded in particular the current tests applied in a mortgage rights application. These are:

1. the nature of and reasons for the default;
2. the ability of the debtor to fulfil within a reasonable time the obligations under the standard security in respect of which the debtor is in default;
3. any action taken by the lender to assist the debtor to fulfil those obligations;
4. where appropriate, participation by the debtor in a debt payment programme approved under Part 1 of the Debt Arrangement and Attachment (Scotland) Act 2002; and
5. the ability of the debtor and any other person residing at the security subjects to secure reasonable alternative accommodation.

 

For those of you following the Bill, one of the recent changes (at the time of writing) is that the court must now look at reasonableness in all cases, and not merely whether the customer appears or is represented, as had been the situation in the Bill as originally introduced.

 

 

A fact which is less obvious on the face of the legislation is that it reverses the burden of satisfying the court. Under the 2001 Act, the responsibility lay on the debtor or other interested party to make an application to seek suspension of the lender’s rights by the court. Such applications could have been in the context of the court action raised by the lender, or as standalone applications seeking to suspend the rights of the lender following the service of a calling-up notice or notice of default. This could be viewed as the lender being entitled to obtain decree unless a barrier was successfully raised by the customer.

 

The 2010 Act approaches the matter from the opposite direction. Neither the customer nor any entitled resident is required to take the active step of lodging any application to oppose the lender. Instead, it is for the lender to satisfy the court that decree should be granted, perhaps in the face of opposition from the customer, but in any event even where the customer has not appeared. This applies both to the pre-action requirements and to the general question of whether it is reasonable for the court to grant decree.

 

Entitled residents

Where a challenge is raised, this will generally be considered by the court in response to appearance by or on behalf of the customer but it is also possible for persons who are not parties to the proceedings to invoke the court’s consideration of these provisions. Such people are now to be called “entitled residents” and they are the same categories of people (spouse, civil partner, ex-spouse/partner with a child) as were entitled to make mortgage rights applications.

 

Lay representation

As part of a range of measures to address the low take up of the Mortgage Rights Act, the Scottish government decided to permit lay representation in repossession proceedings relating to residential property. In progressing the Bill, the working assumption of the government was that lay representation may be sought in 25 per cent of challenged repossession actions.

 

The approved lay representative may appear at any time but must throughout the proceedings satisfy the court that he is a suitable person to appear and that he is duly authorised. To become an approved lay representative, an individual must be approved by one of a number of organisations to be set out by secondary legislation, likely to include councils, citizens advice bureaux and other respected advice agencies.

 

Recall of decree

The new legislation may also require decrees (possession orders) granted by the court to be automatically recalled, at least on a first application. The persons entitled to apply for recall of decree are the debtor or any of the entitled residents.

 

So why are Scottish customers now likely to be better off than their English counterparts?

Firstly, the pre-action protocol in England & Wales does not have the full force of law and there are limits around the extent of its effect (even if it is all too common to see it interpreted widely by the courts). In Scotland, the pre-action requirements are revered in both primary and secondary legislation and the court must not grant an order if it is not satisfied about the extent to which lenders have complied.

 

Secondly, where a customer does not adhere to an arrangement during or following a court action, the lender in England & Wales will often be able to fall back on a Suspended Possession Order; in Scotland, by contrast, the lender will simply return to court, with the court still requiring to be persuaded at that stage that the equivalent of a possession order should be granted.

 

The likely impact of the 2010 Act

It is almost certain that the 2010 Act will have much greater impact than the 2001 Act, for the simple reason that it provides a default position that cases must call in court and be considered by a sheriff. The Financial Memorandum which has been lodged with the Scottish Parliament estimates that up to 50 per cent of actions might be challenged under the new regime, but it is to be hoped that is an overestimate. Even if this is true, there are bound to be an increase in the number of contested hearings and it is essential that both lenders and the courts are fully prepared for the challenging times ahead.

 

 

Mark Higgins is partner, insurance lending & recoveries at Irwin Mitchell LLP and author of the book “Scottish Repossessions”

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