When is it reasonable to pursue a decree for possession?
A commonly raised defence in possession proceedings in Scotland is that a lender is being ‘unreasonable’ by pursuing a decree for possession, or is in breach of the provisions of the Home Owner and Debtor Protection (Scotland) Act 2010. There have been two cases in recent months that have examined the issue of reasonableness and in both cases, the court ruled in favour of the lender.
In Westfoot Investments Ltd v European Property Holdings Inc the sheriff court was asked to consider whether the defender, a Panamanian company, could rely on the provisions of the Home Owner and Debtor Protection (Scotland) Act 2010 notwithstanding that the defender was a body corporate rather than an individual. The facts of the case were that the defender company had granted a standard security to the lender pursuer and was in default of the terms of the loan secured. The defender company did not deny the arrears on the loan but alleged that the lender pursuer had failed to comply with the range of statutory obligations aimed at protecting homeowners from being unfairly removed from their homes.
The sheriff rejected the argument advanced by the defender and found that a company (in contrast to a natural person) does not have a ‘home’ in the sense that it would be required to find alternative accommodation if it were ejected from the premises and therefore the defender could not rely on the reasonableness argument. The sheriff stated that “corporate borrowers that grant standard securities over their residential property assets and use these as collateral security, to raise capital on the financial markets, are not included within the scope of the protection created. That kind of borrowing is a commercial activity.”
In the Westfoot case, the defence was brought by the defender company notwithstanding that the property was tenanted. It is not clear whether a tenant of the property would have been able to defend the case on the basis of reasonableness.
In the case of Swift Advances plc v Martin and others the Inner House of the Court of Session was asked whether it was reasonable for the lender pursuer to seek a decree for possession in circumstances where an offer to purchase the property had been made but was not sufficient to redeem the account.
The facts of the Swift case were that the loan secured by way of the standard security was in arrears and was no longer affordable to the defenders. A decree for possession was granted but this was appealed, first to the Sheriff Principal and then to the Court of Session on the basis that the lender pursuer had not complied with the pre-action requirements and that to pursue a decree for possession was unreasonable.
The defenders had produced evidence that the security property was worth £350,000 and they were willing to sell to their daughter and son-in-law for that sum. In contrast, the lender pursuer had obtained a valuation at the time of the advance placing the value of the property at £750,000 and had obtained a further valuation in 2010 which stated that the property was worth in excess of £600,000. Given that the sum owing to the lender exceeded £600,000, and there was a security ahead of it in terms of priority, the lender pursuer was not willing to allow that sale to complete and instead wanted to take possession of the property to sell it on the open market.
Refusing the appeal the court held that:
- A mortgage lender is contractually entitled to seek to reclaim the full debt owed to it;
- The terms of the section 1970 Act which relates to PARs are not designed to limit the lender’s right of recovery;
- Instead, they are intended to prevent the lender from taking unreasonable action in order to recover the full debt;
- The intention (as is well known) is that the lender will work with the borrower to find some alternative means of the borrower fulfilling their obligation where possible;
- There is no obligation on the lender to accept payment of only part of the debt.
Lord Malcolm commented on the actions of the lender pursuer in negotiating with the defenders stating “What was done far exceeded anything required to meet the needs of s24A” and “it follows that there was no bar to the raising of the current court proceedings.”
He further stated “In the circumstances there was no burden on Swift to prove that a sale would achieve a higher price than the [£350,000] valuation...”
Had the defenders been willing to market the property on the open market themselves, the court may have taken a different approach, as may the lender pursuer. However it seems clear that reasonableness must work both ways.