Wed 09 Sep 2015

Making reasonable efforts: Court of Session provides guidance in Scottish bank repossessions

An appeal to the Inner House of Court of Session (Swift Advances Ltd v Martin, [2015] CSIH 65) has provided important guidance to lenders and borrowers on the pre-action protocols for secured repossession actions in Scotland.

These procedures were brought in by the Home Owner and Debtor Protection (Scotland) Act 2010 and apply to all residential mortgages in Scotland. There has, however, been little judicial guidance on how far the lender has to consider proposals made by the borrower, especially where they are significantly below what the lender wishes.

The facts of the case are relatively simple. In 2007 Mr and Mrs James Martin borrowed £426,000 from Swift, which they secured over a second-ranking standard security on a residential property. Monthly repayments were £4,127 but, "against a background of continuing non-payment of the monthly sums", calling up notices were issued by Swift in January 2012 followed by court action for repossession in Kilmarnock Sheriff Court. As at the date of the proof (witness hearing) in Kilmarnock, the arrears amounted to £182,500 (equivalent to over 42 months) and the outstanding balance due to Swift was around £638,000. Mr Martin had also been bankrupt for some time and suffered health issues.

Despite prolonged discussions between the parties, the best proposal made by the Martins was a sale of the property to family members at £300,000. This was significantly less than previous valuations. Though there was a supporting valuation for the price of £300,000, questions remained as to the correct valuation and Swift wished to see the property repossessed and placed on the open market. The sums secured under the first ranking security are not discussed in the case but it was clear that a sale at £300,000 would make little dent into the £638,000 due to Swift (perhaps not even clearing current arrears).

The Sheriff and Sheriff Principal both held that Swift were entitled to the orders sought including rights to repossess and sell. The Martins appealed to the Inner House on three grounds. The first two were that Swift did not comply with the pre-action protocol requirements introduced by the 2010 Act, and now set out in section 24A of the Conveyancing & Feudal Reform (Scotland) 1970 Act (as amended).  The third was that, in all the circumstances, it was not reasonable to allow repossession in terms of section 24(5) of the 1970 Act.

Amongst other arguments, the Martins submitted that "it is a pre-action requirement that a creditor must make 'reasonable efforts to agree with the borrower proposals in respect of future payments to the creditor under the standard security' (in terms of section 24A(3) of the 1970 Act) and that "properly construed, the proposal to sell the property [to their relations]… was a proposal within the meaning of this pre-action requirement". The court disagreed with this, and with the further argument that it was unreasonable to evict in the circumstances in terms of section 24(5), and refused the appeal. 

Delivering the opinion of the court, Lord Malcolm reviewed the Act and guidance but concluded that nothing "prevents court action if, after appropriate communications, it is clear that the borrower simply cannot comply with his obligations in full". Swift had undoubtedly communicated with the Martins on their offer but it was clear that the offer could never result in full repayment. He noted that the "whole tenor of section 24A(3) and (4) is of discussions aimed at an alternative agreement whereby the borrower’s obligations can be fulfilled, for example, on the basis of a lower monthly payment extending over a longer period. There is nothing to suggest that a proposal to pay only a fraction of the sum due must be accepted, or that it can stop the raising of court proceedings." Lord Malcolm approved the summary by the Sheriff Principal that "through their solicitors, both parties 'made reasonable efforts to reach an agreement … albeit they failed in those efforts, and that the pursuers as creditor therefore sufficiently complied with the pre‑action requirements… of the 1970 Act'". The court also noted "there are provisions in the Act reflective of the widely held view that an open market sale is likely to produce the best price", thus giving support to Swift's request to repossess so that they could test the market.

Undoubtedly some of this decision hangs on the specific facts of the case, particularly the long period of discussion between Swift and the Martins' solicitors and that the Martins' offer did not develop much during the period. From the decision, lenders should take note that genuine engagement with a borrower's proposal should be given. That said, a proposal which will not ultimately result in full repayment, is one which the courts will regard as unacceptable and there is a limit to how much a lender has to consider an untenable proposal. A sensible reading of the case is that lenders should tread far more carefully where the borrower's request is for a very extended repayment period, even one that takes the lender far beyond their usual lending boundaries.

For borrowers, the lessons are less clear. Making your best offer early and clearly is always sensible, but if you are in negative equity and the lender is not willing to consent to a voluntary sale with a shortfall, then repossession may be inevitable. This is not to say that a lender will automatically insist on repossession but, if they do and you are not in a position to service the lending or clear the lending in full through a sale, then the pre-action protocols do not provide any greater protection or right to remain in the property. Appreciating this early, planning accordingly, and co-operating with the lender on repossession may be the 'least bad' result in the long run for those in such difficulties. Discussing matters with a CAB, money advice service or a solicitor is a sensible first step.

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