Heritable securities

Heritable securities Commissioner

Professor Frankie McCarthy

Team Members

Stephen Crilly, Project Manager
Rebecca Gale, 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 Tenth Programme of Law Reform (see paragraphs 2.7 to 2.9).

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, and we have set up an expert advisory group which has met five times. We have received many helpful comments from the group and from other interested parties.

It is our intention to issue 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 will deal with two discrete, complex issues, namely (i) mechanisms for taking security over a standard security (sometimes known as sub-security arrangements), and (ii) standard securities in respect of non-monetary obligations where the remedy sought is performance.

We aim to publish the third discussion paper in early 2023.  We intend then to publish a single Report and draft Bill, which will be informed by the responses to the discussion papers.  Our current estimate for publication of the report and draft Bill is 2025.

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 consults on 69 proposals or questions. The consultation period is currently open and will close on 1 April 2022.  We refer consultees to the open letter found here and ask that they respond using the response form if possible.

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.     

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 has 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@scotlawcom.gov.uk