The Supreme Court decision in RBS v Wilson in November 2010 overruled long-established procedures used by secured lenders in repossession proceedings in respect of secured properties by ruling that a calling-up notice was necessary in every case where a heritable creditor wishes to remove the defaulting borrower from the secured property. (See our article "Repossession: Supreme court discredits decades of practice"). This decision has had numerous implications.
Exclusion from the Keeper's indemnity
For purchasers in a transaction involving a repossessed property that settled prior to this decision there is a risk that if the lender has not followed the calling-up notice procedure the Keeper of the Land Register may exclude indemnity in the purchaser's title. The Keeper's indemnity may be excluded in relation to any loss suffered by the purchaser due to a successful action by the defaulting borrower to reduce the title granted to the purchaser by the secured lender. In practice title indemnity insurance has commonly been made available to cover this risk.
The Keeper has also made a policy decision in relation to any other standard securities granted by the borrower that ranked alongside or postponed to the security under which the property was repossessed. The Conveyancing and Feudal Reform (Scotland) Act 1970 provides that in a repossession sale the title is automatically cleared of these other securities. However, the Keeper has decided not to remove any such securities from the title for transactions affected by the decision in RBS v Wilson, and has been expressly excluding indemnity in respect of any loss that may result from rectifying the title to remove those securities, or in case the property is found not to have been disburdened of them. Title indemnity insurance has not been made readily available to cover this risk. The Law Society of Scotland, having obtained academic advice indicating that this later policy of the Keeper is flawed, has asked her to review this.
The decision has also led to uncertainty for ongoing transactions involving repossessed properties where the lender had not utilised the calling up notice procedure. Purchasers' solicitors have been advised to delay settlement until the creditors can either produce evidence that they have followed the correct calling-up notice procedure, or obtained sufficient title indemnity insurance to cover the risk. The effects of this aspect of the decision should lessen over time as subsequent repossession actions will now follow the full calling up procedure.
Changes to lenders' practices
In addition lenders have had to overhaul their standard practice for all new cases and dismiss numerous ongoing proceedings that did not utilise the calling up notice procedure so they can be restarted following that procedure.
Scottish Government Consultation
As a result the Scottish Government launched a Consultation on the long-term implications of the Supreme Court ruling, and whether legislation should be introduced to return the repossession procedure to something reflecting the standard practice prior to the decision. The results of the Consultation were recently published and indicated that a majority of the respondents (consisting mainly of lenders, legal firms and representative/trade bodies) consider legislative changes to be necessary.
The main long-term implications causing concern for the respondents, in particular the secured lenders, were the increased timescales involved (with a minimum two month delay), additional costs and potential increases to losses incurred by lenders where the defaulting borrower is in negative equity. There was a concern about the increased costs for borrowers, both in respect of legal costs being awarded against them and additional interest accruing on their debt during the notice period.
A number of the respondents also expressed the view that the recently introduced Home Owner and Debtor Protection (Scotland) Act 2010 was already leading to increased timescales and costs and that legislative changes may be required to clarify this. Other respondents commented on the general lack of clarity and potential inconsistency with the law in relating to repossessions. A number of respondents were also concerned that this decision left the Scottish mortgage market at a disadvantage to the rest of the UK due the impact on lender confidence.
No immediate legislative change
Despite the majority of respondents favouring legislative changes the Scottish Government has indicated that it does not intend to legislate on the issue at present. The Council of Mortgage Lenders expressed its disappointment, commenting that it believes the increased timescale can be detrimental both to lenders and defaulting borrowers, who are simply falling further into arrears, as the decision will result in higher costs and extensive delays for both parties.
However, proposals for legislative review were already in hand. In its Eighth Programme of Law Reform, the Scottish Law Commission had indicated its intention to conduct a systematic review of the 1970 Act, saying, in what turns out to be uncannily prescient terms given the Supreme Court decision, that the rules about enforcement are "complex and hard to understand, and indeed it may be open to debate whether even after exhaustive study they really make sense".
Small wonder then casualties of the 1970 Act continue to arise. In the Sheriff Court case of Santander UK plc v Gallagher (Edinburgh Sheriff court 26 July 2011), although the calling up procedure was adopted, the notice itself was served by Sheriff Officers, who deposited the notice through the borrowers letter box having been unable to locate him personally or finding anyone to accept service. This is a traditional method of service of many types of court document under Sheriff Court Rules. Unfortunately, in this case, the Sheriff decided that it was not sufficient service for the purposes of the 1970 Act, which requires "delivery to the person on whom it is desired to be served" and specifies that that may be either personally, or by recorded delivery, or by sending to the Extractor of the Court of Session. Since none of these procedures were followed, the service of the calling up notice was not competent, and the bank's application for repossession was dismissed.
Current focus for lenders
The focus for lenders and their advisors is now to continue to adapt to the "new" mandatory procedure and the related increases in time and costs. The concern is that while the process of removing a defaulting borrower from the secured property may take longer, it is does not offer them any increased protection from repossession taking place once the correct procedure is followed and potentially the increased timescale and costs could increase the debt owed by them. There is no immediate prospect of a review of the 1970 Act, since it falls within the Scottish law Commission's programme which extends to 2014. Given the long-term impact of these issues on the Scottish mortgage market, and lenders' confidence, it may be that the Commission will consider accelerating the timing of their review.
To view the summary of responses to the Scottish Government consultation on RBS v Wilson, click here.
To read the decision in Santander UK plc v Gallagher, click here.