Heritable securities

Commissioner

Professor Frankie McCarthy

Team Members

Stephen Crilly, Project Manager
Georgia McCuaig, Legal Assistant

Background

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 Eleventh Programme of Law Reform (see paragraphs 2.6 to 2.8).

This area of law relates to the securing of debt over "heritable property", which means in effect land and buildings.

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 provides for a “standard security” to be the main (and in most cases only) method of securing debt over heritable property. 

This legislation applies to land and buildings 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 English term “mortgage” is often used to describe a standard security in Scotland.  There are however significant differences between a standard security in Scotland and a mortgage in England.

A standard security is created by registration in the Land Register of Scotland.  If the debtor defaults on the loan, the security holder can exercise certain remedies to try to recoup the amount outstanding.  Exercise of the security generally involves the sale of the property.

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

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

Progress so far

This is a large project which is expected to run for 7 or 8 years.

Work began in early 2018.  We have set up an expert advisory group which has met formally several times, and provided informal input regularly over the course of the project to date.  We have received many helpful comments from the group and from other interested parties.

We have published three Discussion Papers: 

• The first paper considers pre-default matters such as the creation and transfer of heritable securities and the obligations which they can secure; 
• The second paper considers post-default matters, that is to say how heritable securities are exercised to enforce the obligations they secure; and
• The third paper considers two discrete, complex issues, namely (i) heritable securities taken in respect of non-monetary obligations, and (ii) sub-security arrangements - the situation where a standard security is taken over a standard security.

We intend to publish a single report and draft Bill, which will be informed by the responses to all three Discussion Papers.  

Discussion Paper 1: Pre-default

Our first Discussion Paper was published on 18 June 2019, along with an executive summary.  The paper consulted on 61 proposals or questions.  In the paper, we set out how we aim to clarify and consolidate the current law, and to provide more flexible ways to create and deal with a standard security (so helping for example to facilitate paperless transactions and e-registration).

The consultation on the paper closed on 30 September 2019 and we received around 20 written responses.  These have informed our work on the second and third Discussion Papers, and will be given full consideration in the final report.

Discussion Paper 2: Default and Post-Default

Our second Discussion Paper was published on 17 December 2021, along with an executive summary.  It consulted on 69 proposals or questions.  The consultation on this paper closed on 1 April 2022, and we received 24 responses.

In this paper we propose a new, streamlined scheme for exercise of heritable securities in Scotland.

The purpose of a heritable security is to safeguard performance of an underlying obligation - typically the obligation of a debtor to repay a loan.  Where the debtor defaults on repayments, a standard security allows the holder to exercise certain remedies, typically to sell the property in which the security is held and recoup the amount outstanding on the loan from the sale proceeds.  

The main work of this Discussion Paper is a systematic review of the process by which a standard security is exercised.  We consider in detail the circumstances which should trigger a security holder’s right to take action against a debtor and the steps a security holder must take prior to exercising the security, including service of notices and court proceedings.  We also consider enhanced protections available to debtors who are at risk of losing their homes and propose reform to the current law.

We consider the specific remedies available as a result of the security and how they should be exercised.  This includes consideration of a security holder’s right to eject occupants and take possession of the property in which the security is held; to collect rent from tenants where the property is leased; to sell the property; and to foreclose (when the security holder itself becomes the owner of the property).

We also examine issues of ranking where more than one standard security is held in the same property.

Our provisional proposals are designed to achieve substantial improvements across the enforcement process as a whole.   

Discussion Paper 3: Non-monetary securities and sub-securities

Our third Discussion Paper was published on 29 June 2023, along with an executive summary.  Consultation on the 19 questions posed in the paper closed on 29 September 2023, and we received 16 responses.

In summer 2023 we hosted two webinars to introduce the Discussion Paper to potential consultees.  You can see a recording of Professor McCarthy’s presentation on the Discussion Paper on our YouTube channel.  The slides which accompanied the presentation are here.

The paper explores two complex issues arising in the law of heritable securities, namely heritable securities in respect of non-monetary obligations and sub-security arrangements.

In the context of heritable securities in Scotland, the term “non-monetary obligation” generally refers to an obligation to do something other than pay a debt.  Granting a heritable security in respect of an obligation of this type is a common occurrence in particular types of property transaction, for example an obligation of a land owner to sell their land under an option agreement.  Confusion arises as to how a heritable security in respect of a non-monetary obligation operates to enforce performance of that obligation when, in reality, the security can only be used as a means of extracting money from the secured asset.

A sub-security arrangement, in this context, describes the situation where a heritable security is taken over an existing heritable security.  Unlike a more conventional security, where the security property will often be land, the security property in this arrangement is itself a security.  The creation of such sub-securities is viewed as an important step in high-value securitisation and debt warehousing transactions in the commercial finance sector.  While the current law permits the creation of these “secondary” or “piggyback” standard securities, questions arise over the conceptual soundness and practical utility of this approach.

In the paper we explore the historical background to the law relating to non-monetary securities together with their use today.  We put forward proposals for reform in relation to non-monetary securities to reflect the fact that they can, in reality, only be used to generate money for the security holder in the event of default.  We also propose a new scheme for protecting contractual obligations to transfer land – referred to in the paper as the conditional advance notice scheme.  The paper also considers the law relating to heritable sub-securities and their use in a typical securitisation arrangement.  We tentatively propose that it should be incompetent in future to take a standard security over a standard security.  We also examine the law in relation to assignations in security of standard securities and seek views on whether future legislation should make provision for such an arrangement.

Research paper by Dr John MacLeod

Dr John MacLeod, formerly of the University of Glasgow and now of 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.  The project team made substantial use of the paper during its work on the second Discussion Paper.

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. 

Contact

For further information, please contact Stephen Crilly at info@scotlawcom.gov.uk.