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Common sense and common practice prevail in Scottish mortgage trading market

Mortgage document with key Print publication

06/03/2018

Following on from last year’s saga in the cases of OneSavings Bank v Burns and Shear v Clipper Holdings [1], Sheriff Hamilton at Greenock in Promontoria (Henrico) Limited v The Firm of Portico Holdings (Scotland) and Linda Arthur [2] has confirmed a degree of flexibility for lenders in executing the prescribed statutory form, when assigning a Standard Security (legal charge).  Walker Morris’ Banking Litigation partner Louise Power explains why those involved with the Scottish mortgage trading market can, once again, breathe a sigh of relief.

Statutory form saga

It has been common practice for some years in the Scottish mortgage trading market for portfolio or bulk mortgage transfers (or ‘assignations’) to be completed in such a way as arguably does not strictly comply with a prescribed process for completing the relevant statutory form (Form A).

In 2017, the Burns and Clipper Holdings cases considered the debate over whether such assignations were valid, or left lenders exposed and unable to repossess secured properties when customers are in arrears or where mortgage terms expire with repayment outstanding.

Opportunity for clarification

In the recent Promontoria v Portico and Linda Arthur case, the Second Defender, a Linda McArthur, along with her husband, had been a Partner and Trustee of the First Defender, the firm of Portico Holdings (Scotland) the courts were afforded the opportunity to provide some much-needed clarification for the market

34 Standard Securities (‘the Securities’) had been granted in favour of Clydesdale Bank (‘CDB’) over the First and Second Defender’s properties over a period stretching from 1999 to 2009. All of the Securities were assigned by CDB to Promontoria in one Assignation in June 2015. CDB was permitted to perform the Assignation under the terms of the Securities.

The Defenders defaulted on repayment and Promontoria issued proceedings to repossess the properties under the terms of the Standard Securities. The Defenders challenged the validity of the Assignation of the Securities to Promontoria on the basis that the Assignation had not specified the precise sums owed by the Defenders. The exact amounts owed by the Defenders to Promontoria had been in dispute for a number of years and the Defenders’ Agent argued that it was essential for a debtor to know what had been assigned, the value of what was assigned and that it was therefore impossible for the Defenders to know how much they owed Promontoria.

Promontoria argued that although the Assignation had not specified the precise sums owed by the Defenders and that on a closer reading of the governing legislation, the Conveyancing and Feudal Reform (Scotland) Act 1970, such specification was not required. Furthermore, she submitted to the court that the omission of the exact sums at the date of the Assignation had caused no prejudice to the Defenders who knew that they were obliged to pay the relevant sums to the CDB in the first instance, and to the Promontoria following the Assignation.

The decision

The Sheriff found in favour of Promontoria – the Assignation had been valid and they were entitled to enforce the rights originally granted to CDB under the terms of the Security. Accordingly, the Court granted the Pursuers the right to repossess the Properties.

The Sheriff in his judgement made it clear that the Defenders had suffered no prejudice on account of the Assignation omitting to specify the precise sums owed. The challenge raised by the Defenders was purely technical and in the Sheriff’s view was a delaying tactic in order to avoid repaying the debts owed.

In declining to specify the exact sums owed when drawing up the Assignation documents, CDB had acted reasonably. The Securities were not fixed sum securities and therefore the Assignation complied with the stated statutory requirement of “as closely as may be” to the Form A in the circumstances.

Analysis and advice

The Sheriff reaffirmed the decision in Shear v Clipper Holdings, sending out a clear message once again to defenders considering running the arguments in OneSavings Bank v Burns that the statutory prescribed form, Form A, may be departed from where appropriate.

Where it is not possible to specify sums owed in the context of an Assignation, the nature of the debt should be clearly stated by lenders, along with the extent to which the security is being assigned.

Instead of stating a fixed sum, it may be acceptable for the parties to agree that a security is being assigned “to the extent of all obligations and liabilities due or become due by the relevant Chargor to the buyer”.

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[1] [2017] SC BAN 20; and [2017] Outer House, Court of Session, 26 may 2017
[2] [2018] SC GRE 5

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