Professor Frankie McCarthy
Stephen Crilly, Project Manager
Charlie MacKay, 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 "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 can be enforced. Enforcement generally involves the sale of the property.
The law on 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  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 will review 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 second discussion paper in Autumn 2021 and the third 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 Summer 2025.
Discussion Paper 1: Pre-default
Our first discussion paper was published on 18 June 2019, and consults on 61 proposals or questions. An executive summary of the paper is also available. The consultation closed 30 September 2019 and we received around 20 written responses.
The discussion paper sets 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).
In the paper, we propose to keep the name ‘standard security’, that the standard security should continue to be the only form of heritable security that can be granted, and that current enactments (including the 1970 Act) should be replaced by a new Act.
We consider that there should no longer be statutory forms for security documents, and that instead the law should set out requirements to be met by (for example) the constitutive document of a standard security.
We propose that the current standard conditions, including their rules on enforcement, are abolished.
We ask whether a new Act should provide a freely available default set of standard conditions for use for example by non-commercial lenders. These conditions would not cover enforcement.
We ask if a creditor in a security granted before the encumbered property has been leased should be able to evict a residential tenant, and for comments on leases generally (and residential tenancies in particular).
We consider that the effect of using a standard security to secure a positive non-monetary obligation (known as an obligation ad factum praestandum) - such as an option to buy land if planning permission is granted - is unclear.
Our preliminary view as set out in the discussion paper is that the monetary element of any claim relating to a non-monetary obligation should be able to be secured by a standard security, but nothing else. This follows from the fact that the methods for enforcing a security are designed to raise money.
It may be that there are other ways to enforce or secure non-monetary obligations relating to land, and we had proposed that there should be a separate law reform project that would consider how options and similar agreements might be made enforceable against third parties by means of registration (as is possible in some jurisdictions). Having considered the responses to the first discussion paper and after further discussion with stakeholders we have decided to explore recommendations to deal with this issue in this project. As alluded to above we will explore this further in the third discussion paper.
The law on assignation (transfer) of securities is unclear. We propose that the effect of an assignation should not limit the security to the amount due to the then current security holder at the date of assignation, and that future advances made by the assignee (new security holder) should be capable of being secured.
We ask whether there should be any restrictions on what all-sums securities may secure, and in particular whether the security should cover pre-assignation debts owed to the assignee or debts originally owed to other parties.
We propose a number of other technical or minor changes aimed at improving the effectiveness of heritable securities in Scotland.
Discussion Paper 2: Post-default
Work continues on drafting the second discussion paper on default and post-default matters. We have consulted extensively with the Advisory Group to the project and other interested to parties on outline proposals, and aim to publish this discussion paper in Autumn 2021.
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.
Issues raised with the Commission
Stakeholders have made the following comments:
(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 plc v Wilson above),
(c) Residential property is protected, but it is not always clear what is or is not residential, 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 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.
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