Turbulent year for repossession law in Scotland

Denise Loney, head of litigation Scotland at Optima Legal, looks at how repossession proceedings have changed north of the border since a new legal Act was passed

We’re over a year on from the Home Owner and Debtor Protection (Scotland) Act 2010 (‘’the 2010 Act’’) coming into force and the UK Supreme Court decision in RBS v Wilson. Now that the dust has largely settled, it’s worth reflecting back on what has been a fairly tumultuous year in Scotland for repossession actions and seeing where we are now and perhaps trying also to pick up on any developing trends.

As readers will know, the 2010 Act is divided into two sections - Part 1 which relates to the procedures for recovering possession of heritable property in Scotland; and Part 2 which relates to bankruptcy.

Part 1 introduces three key changes to Scottish procedures - the introduction of Pre Action Requirements (PAR); a requirement for all cases to call in court; and the ability for borrowers to be accompanied in court by lay representatives.

Pre action requirements

When the PAR were introduced in Scotland, they broadly mirrored the Pre Action Protocol (PAP) which had been in existence in England and Wales for several years. The PAP was introduced by judges which obviously contrasts with the Scottish statute introduced procedure. In England and Wales, the PAP is largely regarded as a tick box exercise with few issues being raised. In Scotland, as matters stand, the PAR are onerous and result in significant volumes of paper being produced to evidence that the requirements have been complied with.

Compliance with the PAR is evidenced by completion of the Form 11C. This is a statutory form which is attached to the summary application when the action is being raised. Broadly, the Form 11C requires the creditor to confirm that he has completed the following points in cases where action is being raised due to arrears. The creditor must:

1. Provide the debtor with clear information about the terms of the security, the amount due (including arrears and charges) and copies of relevant correspondence to verify this.
2. Have made reasonable efforts to try and agree future payments with the debtor - reference is usually made to correspondence and telephone calls previously sent/made.
3. Provide the debtor with information as to where he might get advice - a copy of the previous correspondence is usually produced.
4. Encourage the debtor to contact their local authority – a copy of previous correspondence is usually produced.
5. Have had regard to any guidance which may be issued from time to time by Scottish ministers.

The creditor is not permitted to raise proceedings if the debtor is taking steps which are likely to result in the arrears, or whole balance, being paid within a reasonable time. In practical terms, the requirements are now fairly well understood by those practising in this area, i.e. lenders and by sheriffs. Some sheriffs are more particular than others - most notably Sheriff Mackie in Edinburgh Sheriff Court. We are certainly not at the tick box stage yet but it is fair to say that generally, unless a debtor takes issue with anything in Form 11C, it is accepted at face value and we would expect that to remain the position going forward.

Actions to call in court

In terms of the 2010 Act, all actions for repossession of heritable property must now call in court. This was a big change given that prior to the Act, the majority of actions were defended and decrees granted in absence. Approximately 5 per cent of cases were either defended or had Mortgage Rights Minutes lodged.

So what has the experience been so far of hearings which have taken place under the 2010 Act? We have been monitoring outcomes so that we can feedback relevant data to our clients.

In broad terms, approximately 27 per cent of cases had no appearance for or on behalf of the defender at the hearing and therefore decree was granted. Approximately 21 per cent of callings continued further to payment proposals being received - often the day before the hearing so time was needed to obtain instructions and, in some cases, see a completed income and expenditure form.

Approximately 17 per cent of cases continued to allow the property to either be sold or remortgaged or for the borrower to progress an application under one of the government schemes, i.e. mortgage to rent or mortgage to shared equity.

Only 6 per cent of cases so far have proceeded to having a proof or evidential hearing fixed. In those cases, the courts have been ordering written defences. It is probably too early to say with any degree of certainty what kind of challenges we might see to these cases. Many of the written defences have been very similar to what would have been contained in an old Mortgage Rights Minute in that they set out the borrower’s circumstances, the reason for the arrears and then ask that the court impose some form of delay on the lender in enforcing his rights.

Lay representation

The 2010 Act allows borrowers to be represented by approved lay people. Some lenders were concerned about this, principally in relation to the quality and objectivity of such representation. Much of that concern has not so far become reality as there have been very few cases where defenders have been represented by a lay person. The majority of defenders, where an appearance was required, either appeared themselves or with a solicitor from a private firm or from advice agencies such as a law centre or the offices established by the Scottish Legal Aid Board (SLAB).

RBS v Wilson

You will be aware of the terms of the Supreme Court decision in RBS v Wilson which substantially changed the face of repossession procedures in Scotland. With effect from 24 November 2010, any court action for repossession of heritable property must be preceded by the service and expiry of a Calling Up Notice. This has lengthened the process for recovery, significantly the two month notice period which applies to the Calling Up Notice. Having said that, most lenders have now adjusted to the new procedures and some are instructing their solicitors at an earlier stage than previously to build in time for the Calling Up Notice to be served and expire. In some cases, the service of the formal calling up has proved to be helpful, with some lenders noting increased contact by borrowers at an earlier stage in the process, thus resulting in payment arrangements being agreed sooner and costs also being reduced.

Following issue of the decision, any action then pending in which a Calling Up Notice had not been served, required to be recommenced raising the all important issue of expenses. In the main, such actions have been dismissed on a no expenses due to, or by, either party based on the principle that the lender should not generally be penalised for a change in the law.  Plenty of borrowers tried to seek an award of expenses but subject to a handful of exceptions were largely unsuccessful.

However, the issue of judicial expenses was only part of the overall picture. A number of borrowers sought to query with their lender what level of costs were going to be applied to their mortgage account. The approach being taken by lenders varied especially in the absence of any formal comment from the regulator, the FSA. Some borrowers sought undertakings, in advance from their lender, that no costs would be added to their account on the basis this could be seen as a double whammy in circumstances where actions were being dismissed with no award being made.

Some lenders decided to make no decisions, pending receiving guidance from the FSA. Others decided that none of the costs incurred, in relation to what transpired to be a non compliant action, would be debited to the borrower, with yet other lenders adopting the position that all costs, for non compliant and compliant action, being debited, as these could be justified both in terms of the standard conditions which apply to securities under the 1970 Act and the relevant industry rules. Whilst the FSA has not issued any formal written guidance, it is understood that they indicated to the Council of Mortgage Lenders in September this year that the FSA would not regard the addition of both sets of costs to the mortgage account as any sort of breach.

Santander

Following on from RBS v Wilson and the increased focus on the requirement to serve Calling Up Notices, some firms of solicitors decided to serve their calling ups on borrowers by sheriff officers. This practice was scrutinised by Sheriff Mackie of Edinburgh Sheriff Court in July 2011 in the case Santander UK plc v David Gallagher.

In that case, the pursuers had instructed their solicitors to serve a Calling Up Notice on the borrower in February 2011. This was done by sheriff officers on 18 February by means of letterbox delivery and subsequent first class post. Court proceedings were thereafter raised and the case called in court on 1 July, being continued until 15 July, for the sheriff to be addressed on the mode of service used, among other matters. Sheriff Mackie had queried the competency of service of a Calling Up Notice by way of sheriff officer and asked to be addressed on that on 15 July. The submissions then focused on the provisions contained in s19 of the 1970 Act. The wording of s19(6) provides that:

‘’The service of a Calling Up Notice may be made by delivery to the person on whom it is desired to be served or the notice may be sent by registered post or by recorded delivery to him at his last known address…. And if the address of the person on whom the notice is desired to be served is not known, or if it is not known whether that person is still alive, or if the packet containing a Calling Up Notice is returned to the creditor with an intimation that it could not be delivered, that notice shall be sent to the Extractor of the Court of Session….’’

The solicitors acting for Santander argued that the mode of service used in this case was sufficient, as it had resulted in ‘delivery to the person on whom it is desired to be served’. Sheriff Mackie however decided that service by sheriff officer by letterbox delivery was not in conformity with s19 and therefore that the application to court was incompetent. Had the Calling Up Notice been served personally into the hands of the borrower, the position would have been different, given the wording of the section provided for ‘delivery to the person’. Failing that, the correct procedure is to serve by registered or recorded delivery post and, so long as the package is not returned, this is deemed to be effective service.

The decision has not been appealed and therefore stands. It is of course not binding on other sheriffs as a matter of law, but in practice has so far been adopted wholesale by other Scottish courts. Within a matter of days of the decision being published, we were receiving calls from other sheriff courts asking how we served our calling ups. For those solicitors who had chosen to use sheriff officers for such service, and where service was affected by letterbox delivery, fresh calling ups were required with fresh proceedings having to be raised on expiry of same - a costly exercise, especially given that a number of the affected cases had already been re-started as a result of RBS v Wilson.

It is an interesting decision and one that reflects the increasing scrutiny that is being applied to these types of cases post RBS v Wilson. There has, however, been a degree of confusion in some quarters since the Santander case with some courts, notably Airdrie for example, who have taken exception to service on the extractor, asserting that it is not compliant with the Santander decision and that it is still to be tested. Another court in the north then decided that Santander meant that all actions had to be served in line with Santander - which is also without merit.

So what does 2012 hold?

As mentioned at the start of this article, the dust has largely settled further to the significant changes we’ve seen in the last year or so. Generally, we may see an increase in numbers of repossession actions being raised.

There appears to be a feeling that, whilst lenders have, over the past three years or so, exercised considerable forbearance to borrowers in difficulty, that period of forbearance may now be coming to an end where no real progress has been made and where, in fact, it may be to the borrower’s detriment, not to now look to take action and thereby put some sort of cap on the borrower’s liability.

I don’t believe any commentators expect the housing market to pick up significantly for perhaps a further four or five years; and it is clearly not in the interests of lenders or borrowers to wait indefinitely for sale conditions to improve when arrears are increasing.