On 11 February 2010, the Home Owner and Debtor Protection (Scotland) Bill was unanimously passed by the Scottish Parliament. The Bill obtained Royal Assent on 18 March 2010, and is now the Home Owner and Debtor Protection (Scotland) Act 2010.

The Bill was introduced on 1 October 2009, intended to increase protection for home owners and debtors generally, but in particular during times of recession. The Act makes various amendments to the Conveyancing and Feudal Reform (Scotland) Act 1970, Mortgage Rights (Scotland) Act 2001 and the Bankruptcy (Scotland) Act 1985.

Main Provisions of the Act

The Act is in three parts –

• Residential Standard Securities: Creditor's Rights on Default;
• Sequestration and Trust Deeds; and
• General (which we do not cover here)

A large proportion of the Mortgage Rights (Scotland) Act 2001 will be repealed.

Residential Standard Securities

Pre-action Requirements

Guidance on the new requirements for lenders considering taking action for possession were issued on 6 August 2010. These require the lender to provide certain prescribed information to the debtor and "make reasonable efforts" to agree proposals with the debtor to avoid action being taken. You can look at these requirements in more detail by clicking here.

Court Hearings

All cases relating to residential property will require to call in Court, regardless of whether the action is defended.

Where the action is defended the act prescribes a 5 point test which the Sheriff must have regard to when considering a creditor application:

• The nature of and reasons for the default;
• The likelihood of the debtor fulfilling the obligations under the Standard Security within a reasonable time;
• Any action taken by the creditor to assist the debtor in fulfilling those obligations;
• Has the debtor been accepted on to the Debt Arrangement Scheme; and
• The ability of the debtor and any other person residing within the property to secure alternative accommodation.

The only exception to the requirement to call in Court would be in cases of voluntary surrender, where the creditor would require to obtain a formal affidavit from the debtor confirming the surrender is voluntary.

Entitled Residents / Lay Representation

The Act allows a wider class of persons (“entitled residents”) to appear in an action for possession and to seek an order from the court to continue proceedings or "any other order which the Court thinks fit". It is not clear what such an order might be, but presumably the remedies are intended to be analogous to those available under the Mortgage Rights (Scotland) Act 2001 at present.

An ‘entitled resident’ will be a spouse/civil partner/’common law’ spouse or civil partner, who’s sole or main residence is the security subjects (in whole or in part). This wider class of persons will also be entitled to seek recall of a decree granted in absence, even if they were not previously a party to the action.

The Act allows for debtors to be represented at court by “authorised lay representatives”. Such representatives will have to satisfy prescribed criteria details of which can be read by clicking here.

Voluntary Surrender

There is new provision for the voluntary surrender of any land/property used to any extent for residential purposes. The provisions relate only following expiry of a Calling-up Notice or Notice of Default. A secured creditor will only be entitled to sell in those circumstances where:

• Warrant of Court is obtained (section 24 of 1970 Act), OR
• The ‘voluntary surrender’ conditions are satisfied, as follows:  (a) the subjects are unoccupied;  (b) each of the new class of entitled residents has confirmed in writing that they do not occupy the subjects and are not aware of anyone else being in occupation; that they consent to the creditor exercising its rights of remedy (i.e. to sell); they certify such consent is given freely.

These provisions still do not bring Scotland in line with England in respect of borrowers voluntarily surrendering their properties and simply handing in the keys to the creditor. As a result, Calling-up Notices/Notices of Default may be used even less often than they are now, as in practical terms, every entitled resident would need to be identified/located and have given written consent to sell.

Sequestrations and Trust Deeds.

Part 2 of the Act amends the Bankruptcy (Scotland) Act 1985.

The Act introduces a new route into bankruptcy – the "certificate" route – whereby a debtor could be sequestrated on the basis of a certificate signed by an authorised person. It would also remove two routes currently in place namely a debtor application for sequestration with concurrence by a creditor and application by a debtor where they have signed a trust deed which has failed to become protected.

Where the new certificate route is used, the Accountant in Bankruptcy would be appointed trustee in all cases.

The debtor would have to satisfy certain criteria – for example they would require to be "apparently insolvent" within the meaning of the Act or meet the low income low asset criteria. It would also be a requirement that they have had no award of bankruptcy against them in the previous 5 years.

The provisions of Section 40, relating to the debtor's family home, are also revised under the Act. The maximum time period which the court can order the sale be suspended for is increased from one year to three. A trustee would also be required to give notice under Section 11 of the Homelessness (Scotland) Act 2003, as heritable creditors are required to do at present.

Trust deeds will also be reformed. The definition is widened to include not only deeds which convey the whole assets of the debtor, but other deeds which exclude certain creditors and/or assets from their scope. This opens the way for trust deeds to exclude family homes from their scope, meaning that asset would not be available to creditors under the deed. Where the asset is included, the provisions of Section 40 are being extended to cover trustees under a trust deed – the provisions do not cover them at present.

Another change to be introduced is that the requirements to advertise in the Edinburgh Gazette are being reduced. The reasoning behind this appears to be that the information being advertised is currently available in a public register held by the Accountant in Bankruptcy, and it is considered that this provision will reduce duplication.

Summary and Conclusions

Under the Act, there is greater onus on Pursuers/creditors to assist debtors experiencing difficulty in fulfilling their obligations. Failure to do so could preclude or severely impair Court action for recovery of possession. The pre-action requirements and the test the Sheriff must apply in the event that a possession action is defended will require Pursuers to maintain clear records of their interactions with their customers. In some cases this may require policy changes within the lenders' organisations.

Court action will likely become the only practical route available to creditors to recover possession of a residential property. Expired default and calling up notices will still be effective to recover possession of vacant non residential property. Once court action is raised, there are new tests to which the Court must have regard. Secured creditors will accordingly wish to consider all of their options, including Sequestration proceedings, to determine whether there is a more cost-effective route to recovery than calling up their standard security.

Finally, as the Act reforms Trust Deeds and appears to envisage the family home (usually the debtor's primary asset) being excluded from their scope, it may be that objections to Trust Deeds will increase, leading to fewer protected trust deeds.

Further Information

For further information on the issues raised in this ezine, please contact Ruari MacNeill, Katrina Lumsdaine, Claire Martin, Andrew Foyle, or your usual contact within the Banking Team.