Heritable securities

Commissioner

Dr Andrew Steven

Team Members

Andrew Crawley, Project Manager
Paul Brogan, Legal Assistant

The reform of the law of heritable securities was first included in our Eighth Programme of Law Reform, and has been carried forward into our Tenth Programme of Law Reform (see paragraphs 2.7 to 2.9).

This area of law relates to the securing of debt over land and buildings, known as “heritable property”.

Background

The law on security over heritable property was systematically reformed by the Conveyancing and Feudal Reform (Scotland) Act 1970, which is still the key legislation in this area.

The 1970 Act provided for a “standard security” to be the only method of securing debt over heritable property.  However, the English term “mortgage” is often used informally by non-lawyers.

A standard security is created by registration in the Land Register of Scotland. If the debtor defaults on the loan, the security can be enforced. Enforcement generally involves the sale of the property.

The 1970 Act applies to heritable property of all types – including residential, commercial and agricultural property.  The debtor protection rules are, however, stronger for residential property than for other types of property.

The Home Owner and Debtor Protection (Scotland) Act 2010 amended the 1970 Act to provide further protections to homeowners on enforcement of a security.

The law on enforcement is complex and hard to understand, as is shown by the decision in Royal Bank of Scotland v Wilson [2010] UKSC 50, and subsequently in other cases such as Royal Bank of Scotland v McConnell; Northern Rock (Asset Management) v Millar 2012 SLT (Sh Ct) 58.

A section-by-section review of the 1970 Act has numerous relatively minor technical problems, so that taken together there is an opportunity for significant improvement.

Progress so far

Work on this project began in early 2018.

We have set up an expert advisory group, which first met in June.  We expect to hold another meeting later this year.

It is our intention to issue two Discussion Papers: 

  • The first will consider pre-default matters such as the creation and transfer of heritable securities and the obligations which they can secure, and
  • The second paper will review post-default matters, that is to say how heritable securities are enforced. 

More is said below on the issues being considered for the purposes of the Discussion Papers. 

We hope to issue the first Discussion Paper in the summer of 2019.  Following consultation on the Discussion Papers, we intend to issue a single Report and draft Bill. 

Research paper by Dr John MacLeod 

Dr John MacLeod, formerly of the University of Glasgow and recently appointed to the University of Edinburgh, has prepared a research paper on enforcement of heritable securities that can be downloaded here

In the paper, Dr MacLeod describes and analyses the law in England and Wales, France, Germany, New Zealand and South Africa, with a view to finding models on which we can draw. 

Any views expressed in the paper are those of Dr MacLeod, but the Commission expects to make substantial use of the paper during the project. 

Dr MacLeod’s work was carried out under the Memorandum of Understanding between the Commission and the Scottish Law Schools. It facilitates the engagement of academics so as to allow them to contribute to our project work by means of their research and other expertise. 

Preliminary meetings 

We have received many helpful comments from the Advisory Group and other interested parties, which are helping us to identify issues to be addressed in the Discussion Papers.

Discussion Paper 1: Pre-default

Among the comments made are that:

(a)        The new legislation should facilitate electronic conveyancing and registration,

(b)        A standard security granted by a company should not need to be registered in both the Land Register and in the Companies Register (known as ‘dual registration’),

(c)        The compulsory forms for security deeds in the 1970 Act should be simplified, 

(d)        The effect of using a standard security to secure a non-monetary obligation (known as an obligation ad factum praestandum) - such as an option to buy land if planning permission is granted - is unclear,

(e)        A standard security should be able to be varied to extend to additional land,

(f)         It should be possible to grant a security over a lease of less than 20 years duration (that is, leases not currently capable of being registered in the Land Register),

(g)        A standard security can be granted over a standard security, but the effect is unclear,

(h)        The encumbered property should be insured for reinstatement value, rather than market value as at present (see standard condition 5 in the 1970 Act),

(i)         The bar on leasing the security subjects without consent is not needed (see standard condition 6 in the 1970 Act),

(j)         The law on assignation of securities is unclear as to whether (for example) an assigned security can cover pre-existing debt owed to the assignee, 

(k)        The right to redeem a standard security can be over-ridden by agreement in some cases, but not in others, and this should be reviewed,

Discussion Paper 2: Post-default

Among the comments made are that:

(a)        A subsequent creditor should not be able to freeze the priority of an earlier creditor (see section 13 of the 1970 Act),

(b)        The rules on enforcement are too complex and should be simplified (see the decision in Royal Bank of Scotland v Wilson above),

(c)        Residential property is protected, but it is not always clear what is or is not residential and what is not, and it might be better to protect specified persons,

(d)        The rules for service on dissolved companies are inconsistent, and service on the Lord Advocate should be competent in all such cases,

(e)        The rules on service on representatives in circumstances other than death, particularly incapacity, need to be clarified, 

(f)         Consideration should be given to requiring service actually to reach the debtor,

(g)        The rules on when pre-action documents must be served should be clarified,

(h)        The rules on which parties who must consent to a voluntary surrender of empty residential property should be reviewed, 

(i)         The meaning of “unoccupied” should be clarified e.g. in its application to holiday homes,

(j)         Where a standard security is over a number of properties it should be possible to enforce it against one of them,

(k)        The meanings of “entering into possession”  and “in lawful possession” as used in the 1970 Act need to be clarified,

(l)         It may be helpful to have a court appointed third party take possession on enforcement, rather than the creditor,

(m)       The liabilities of creditors in possession should be reviewed,

(n)        The rules on ejection during enforcement are greatly in need of improvement,

(o)        The rules on how the creditor is to deal with moveables left in the property, including animals, need to be clarified,

(p)        The creditor has a duty to advertise the sale of security subjects, but it may be enough to impose a duty to obtain the best price reasonably obtainable,

(q)        The remedy of leasing the secured subjects on default (in the absence of court authority) should not be restricted to seven years,

(r)         The expenses to which a creditor is entitled under standard condition 12 of the 1970 Act should be examined, and

(s)        The rule by which an enforcement decree does not prescribe for 20 years should be reviewed given that other enforcement rights prescribe after 5 years under the 1970 Act.

Contact

For further information, please contact Andrew.crawley@scotlawcom.gsi.gov.uk