Repeal of Mortgage Rights Act
7th December 2009
The Scottish Parliament is at present considering important new legislative reforms in the Home Owner & Debtor Protection (Scotland) Bill, which was introduced on 1 October 2009. As part of the government’s response to the Credit Crunch, if passed this will make significant changes to the law, particularly relating to mortgage repossession, bankruptcy and trust deeds.
This article will look at the proposed changes to mortgage repossession law.
Mortgage Repossession
Part 1 of the Bill (section 1―8) proposes to reform the Heritable Securities (Scotland) Act 1894, the Conveyancing & Feudal Reform (Scotland) Act 1970 and the Mortgage Rights (Scotland) Act 2001, effectively repealing most of the 2001 Act.
The main changes are as follows:―
(i) All mortgage repossession cases should call at court (unless the debtor specifically agrees to waive this requirement and confirms this by affidavit). This represents an extremely important and progressive change to the current regime, whereby lenders may obtain a repossession without the case calling at court if the debtor does not lodge a notice of defence or a mortgage rights application. One of the greatest dangers of the current regime lies in lenders “advising” the debtor that s/he need not respond to court papers, thus the lenders obtain a repossession order by default. However, if the case must call at court, then it is more likely the debtor will choose to seek independent advice from a lawyer or other suitably experienced advisor, and the sheriff will have the opportunity to consider the case in open forum.
(ii) There should be a “pre-action protocol” for lenders, setting out what measures they should take before raising a case for repossession. Lenders should take certain pre-litigation measures including the following:― apprise the debtor of the terms of the mortgage contract (“standard security”); provide a breakdown of the debt, i.e. the total sum of the mortgage, arrears and charges; make reasonable efforts to negotiate a repayment arrangement; provide information on sources of independent advice; encourage the debtor to contact the local council; comply with government guidance.
(iii) Removal of the “reasonableness test”. This too represents an extremely important change to the current regime, but, on the face of it, not a progressive one. Under the current regime, if a debtor makes a mortgage rights application, then the sheriff has to consider the reasonableness or otherwise of suspending the lenders’ repossession powers, or to put it another way, whether or not it would be reasonable to evict. However, the Bill apparently proposes to remove any reference to reasonableness in the test itself (albeit the factors informing the court's exercise of the test occasionally refer to "reasonable"). Instead, the test to be applied by the sheriff is as provided in section 2(5):― “The court may grant an application… only if it is satisfied that the creditor [lender] has complied with [the pre-action requirements]… the court is to have regard in particular to… the nature of any reasons for the default; the ability of the debtor to fulfil within a reasonable time the obligations under the standard security in respect of which the debtor is in default; any action taken by the creditor to assist the debtor to fulfil those obligations; where appropriate, participation by the debtor in a debt payment programme approved under Part 1 of the Debt Arrangement and Attachment (Scotland) Act 2002; and the ability of the debtor and any other person residing at the security subjects to secure reasonable alternative accommodation…”.
The reason for the removal of the reasonableness test is not clear. Perhaps Parliament reckons the terms of section 2(5) are sufficient in and of themselves to imply a reasonableness test. However, on the other hand perhaps this should be stipulated expressly in the language of the Bill.
Accordingly, the Bill in is present form makes some welcome proposals. However, there is scope for further improvement. In particular, RLC would wish to see the following amendments:―
(a) Restoration of the reasonableness test.
(b) Clearer guidance on what constitutes a “reasonable time” for the debtor to fulfil the mortgage obligations”. For example, some lenders take the view that it is reasonable to expect the debtor to pay off the entire mortgage arrears within two years, and some sheriffs share this view. However, certain English caselaw tends to suggest it is reasonable to allow the debtor to pay off the arrears over the remaining term of the mortgage, which is usually much longer.
(c) Extension of the categories of protected persons to include tenants of private landlords who have defaulted on their mortgages.
(d) While the practical application of the law is more important than its substantive form, nonetheless, it would perhaps be simpler and clearer to “codify” the changes in a single, amended version of the Mortgage Rights Act, rather than effectively repeal most of that Act.
The text of the Bill may be viewed at http://www.scottish.parliament.uk/s3/bills/32-homeOwner/b32s3-introd.pdf, while the explanatory notes may be viewed at http://www.scottish.parliament.uk/s3/bills/32-homeOwner/b32s3-introd-en.pdf.
End