“A veritable maze” is how Professors Gretton and Reid described the standard warranty enforcement provisions. It is for this reason that the Scottish Law Commission’s (SLC) discussion paper on reforming the law of hereditary titles is a highly regarded publication.
The law relating to hereditary securities must be clear and easy to understand. Unfortunately, in many areas the current law is too complex and, as the authors of the discussion paper note, “it can be questioned whether, even after exhaustive study, they really make sense”. Let’s look at some of the ways the SLC wants to see the law improved.
The first SLC discussion paper, released in June 2019, focused on the creation, conferral, and extinguishment of hereditary titles. This second article is likely to generate the most interest by focusing on default and post-default issues. However, there is no “quick fix” here. A third article will be published in early 2023 on sub-security agreements and security regarding non-monetary obligations before the SLC consolidates the issues into a single report and bill, to be published in 2025.
A simplified diagram
The SLC has helpfully reviewed the current law, taking into account the political intentions behind the original legislative provisions and how the courts have subsequently interpreted those provisions over the years. Overall, the current law is criticized for being too uncertain and too complex. Therefore, the SLC provides a more simplified scheme by which the security holder would enforce the secured obligation and exercise its security.
The document makes it clear that its approach to the whole project is one of “evolution, not revolution”, acknowledging that while the current law can clearly be improved, it is not fundamentally broken. The changes aim to improve the process and ensure that it is more closely aligned with the policy objectives that underpinned the original legislation.
One of the key issues identified was when the debtor is declared in default, thus triggering the security holder’s ability to exercise its remedies under the security. The definition of “defect” is unnecessarily complex and therefore it is not always clear when and how a defect has occurred.
The proposal is that a security holder can only pursue remedies under a standard security for breach of the secured obligation (e.g. failure to make a monthly payment) or in circumstances agreed between the parties (eg, failure to perform obligations arising under the title itself). In these situations, the security holder must serve the debtor with a new form of notice, called a “notice of default”. This would greatly simplify the correct process when there are different notices depending on the type of defect. If the debtor remains in default after the expiry of the notice, the security holder can generally exercise the available remedies without going to court. The ability to pursue remedies without a court order, subject to certain exceptions noted below, is considered to reflect an approach “more in line with modern commercial reality”.
The document seeks opinions on the content of the notice of default, on whom it should be served, the time limits for compliance and, of particular interest to lawyers, clarification on how to serve it.
Enhanced debtor protection measures
One of the situations where a security holder would need a court order to pursue remedies under title is where enhanced debtor protection measures apply. These currently apply where the collateral is used to some extent for residential purposes by the debtor. SLC seeks views on the requirement for such enhanced measures only where (1) the debtor and/or the owner of the collateral is a natural person and (2) the collateral includes or includes a dwelling house. It is suggested that this would clarify the current uncertainty around the phrase “to any extent for residential purposes” and align more closely with the policy intent behind the legislation.
The SLC also recommends changes to when a title holder can apply for an eviction order to evict a person occupying the security property. Ejection is often sought as part of the enforcement process, but is currently provided for by a combination of the Inheritance Securities (Scotland) Act 1894 and common law. The document suggests that the 1894 Act does not apply to standard titles and that provisions for ejection be made in any new legislation, making the only basis for ejection under a standard title the statutory provision. relevant. The SLC also recommends clarifying the position with respect to the elimination of private residential tenants as well as any liability for occupants’ moveable property left in the security property, both of which have been subject to uncertainty under of current law.
While these are the main proposals, the SLC also invites comments on other areas that will be of interest, including:-
- The introduction of an obligation to conform to reasonable standards of commercial practice when exercising a standard warranty. The document notes that some members of the SLC’s advisory group were against this proposal based on the already extensive regulation to which securityholders are subject and that such a requirement could lead to uncertainty as to what is necessary to s comply with it. It will be interesting to see what reaction this proposal will receive.
- Clarification of when a hereditary creditor is “in lawful possession”. When legal possession is established has many practical implications for the title holder. It has been suggested that “taking possession” be defined as taking steps to physically secure the land or buildings in which the security is held, including taking possession through a third party such as a tenant.
- Clarification of the treatment of debtors’ debts which matured before the security holder came into possession and whether to take the same position with respect to accumulated debtors’ debts.
- That a purchaser’s title to a security holder is free from dispute arising from (a) the termination of the obligation secured before the registration of the transfer; or (b) any irregularity in the process by which the security holder’s power of sale was established. This protection would be available when (i) the buyer has paid the value of the property as collateral and (ii) the buyer is acting in good faith. The purchaser will not be acting in good faith if it has constructive knowledge that the process by which the security holder’s power of sale was established was not valid ex face. Given the proposed streamlined enforcement process, SLC does not believe that requiring sight of the notice of default and proof of service, or sight of the court order to verify their validity would be unduly burdensome.
- Clarification on the relationship between the security holder’s legal right to recover security exercise costs and legal costs as determined by the court or agreed between the parties.
The opportunity to improve and clarify the law relating to the enforcement of hereditary titles is extremely welcome. For many people operating in this field, the current arrangements are simply no longer fit for purpose. It will clearly take some time before any of these proposals are adopted, but now is the opportunity to influence reform in this area. The SLC has requested comments on the working document, to be submitted by April 1, 2022.