The Home Owner and Debtor Protection (Scotland) Act 2010 comes into force on 30 September 2010. It will change the law on enforcement of standard securities over property used for any residential purpose. While the law in relation to commercial properties remains unchanged, readers should note that, if a primarily commercial property is used for any residential purpose, e.g. a pub with living accommodation, a hotel with staff quarters, or a farm with a farmhouse on the site, it will be caught by the Act.
Where the new Act applies, the process for enforcement of standard securities will change significantly with Court action becoming necessary in almost all cases. This is likely to lead to delays in enforcement and additional costs caused by attending at Court.
The most significant aspects of the 2010 Act are that (i) lenders are under an obligation to provide a customer with prescribed information as soon as the customer is in default and (ii) lenders are obliged to take reasonable steps to agree proposals with customers. It is therefore essential that lenders have systems in place for ensuring compliance with these new obligations otherwise they risk being prevented from enforcing their security by calling up and repossession.
Information to be provided on default
As soon as is reasonably practicable following the customer's default, the lender must provide the customer with details of:
- The terms of the standard security. This must include details of any charges that may be incurred by the borrower if the default is not remedied.
- The amount due to the lender under the security. This must be broken down so as to differentiate between:
- arrears; and
- any additional charges incurred
The lender must also advise the borrower if he is in default of any other (non-monetary) obligation under the security. This would include loan to value breaches.
As well as providing information on the debt, the lender must also provide to the customer information on sources of advice and assistance on debt management. This includes:
- contact details for a citizens advice bureau or other advice organisation; and
- contact details for the relevant local authority housing department and the lender must encourage the customer to contact the local authority for advice.
Lenders should review all standard form correspondence to ensure compliance with the new Act. The Act will also potentially apply to the enforcement of personal guarantees where these are secured. Specific advice should be sought to ensure lenders comply with the new obligations.
Responding to proposals
The Act requires lenders to make reasonable efforts to agree with the customer proposals for future payments and to fulfil any other obligation under the security, which the customer has defaulted on.
"Reasonable efforts" includes:
- making reasonable attempts to contact the customer to discuss the default. It is suggested that records should be kept of all efforts to contact the customer (even if these are unsuccessful) so that these can be relied upon in Court if necessary.
- notifying the customer within a reasonable time of decisions to accept or reject a customer's proposal. (This notification must be given within 10 working days); and
- considering the affordability of any proposal by the customer taking into account the customer’s personal and financial circumstances, where these are known.
All correspondence and any proposals made by the lender to the customer must be in plain English and must be sufficiently detailed and clear to allow the customer to consider its terms. Where a proposal is made, the customer must also be given a reasonable time to consider it. While there is no definition of reasonable time we would suggest that a period of at least 14 days would be reasonable.