The Scottish Law Commission has today published a second discussion paper on reforming the law of security interests in land and buildings in Scotland.
Patrimonial titles, often called “mortgages”, are essential to the economy. Without them, many people could not afford to buy their homes or expand their businesses. A hereditary security allows a creditor to bring certain types of legal actions against a debtor in the event of a default in payment of his debt.
In practice, this generally resembles a lender ending up selling a borrower’s home or commercial property if the borrower becomes unable to repay their mortgage. When and how a creditor can take action, and the protections in place for the debtor when they do, are the focus of the discussion paper.
Scottish Government statistics show that at least 2,204 ‘repossession’ cases were brought in Scottish courts in 2019/2020. The law governing this form of action should provide for an effective and efficient procedure that incorporates appropriate protection for the most vulnerable debtors. However, much of the current legislation is over 50 years old and has been made more complex by piecemeal changes over the years. It is questionable whether the current regime remains suitable for its purpose.
In this article, the commission proposes a new simplified regime for the enforcement of hereditary titles in Scotland. It considers in detail:
- the circumstances that should trigger a security holder’s right to bring an action against a debtor;
- the steps a security holder must take before exercising security, including enhanced protections for debtors who are at risk of losing their homes;
- the remedies available by virtue of the security, including the power to collect rent from tenants when the mortgaged property is let, the power to evict the occupants and sell the property, and the power to seize (when the holder of the mortgage surety takes possession of the property itself);
- Expenses related to enforcement measures and how they should be covered.
- It also examines the questions of rank between security interests (when several security interests have been created on the same property).
- It solicits the views of those consulted on 69 questions, including:
- should securityholders be subject to an obligation to comply with reasonable standards of commercial practice when pursuing remedies?
- Which debtors and assets should benefit from enhanced protection under the regime?
- how should a new ‘notice of default’ system work to ensure that a debtor is given proper notice that a security holder can take action?
- Should a security holder be allowed to pursue remedies as a result of the warranty other than sale of the property, collection of rental income from the property, or foreclosure?
- While the general ethos of the project is to aim for “evolution, not revolution” of the law, these interim proposals are designed to make substantial improvements to the entire enforcement process.
The committee is very keen to hear from anyone with an interest in the issues raised in the discussion paper, including individuals with home mortgages, small and medium enterprises, third sector organizations that work with debtors , as well as legal practitioners and academics. Comments can be made until April 1, 2022 and will help shape the recommendations to be made in the final report.
Professor Frankie McCarthy, the lead commissioner, said: ‘It is a fact of life that lenders will sometimes have to exercise their mortgage rights to recover monies owed. It is essential for both borrowers and lenders that the law is as clear as possible on how this can happen and that appropriate protection is given to debtors, especially when they are at risk of losing their homes. .
“This discussion paper asks important questions about how to improve the current law and strike the right balance between the interests of borrowers and lenders. We hope to hear from a wide range of people to ensure that our eventual recommendations for reform reflect the needs of all those interested in mortgage law in Scotland.