Pre-action requirements not designed to prevent mortgage lender recovering full debt, Inner House rules
A mortgage lender is entitled to serve calling-up notices to secure repossession and sale of a property where the creditor has considered possible alternative payment arrangements and it is clear that there is no prospect of the debtor being able to fulfil their financial obligations under the standard security.
Judges in the Inner House of the Court of Session held that the pre-action requirements introduced by section 24A of the Home Owner and Debtor Protection (Scotland) Act 2010 were designed to ensure that there is a “genuine exploration” of alternative arrangements to remedy the default and not to “limit” a creditor’s right to recover the full debt or to stop the lender raising court proceedings.
Lord Brodie, Lady Dorrian and Lord Malcolm refused an appeal by Mr & Mrs James Martin against decisions by the sheriff at Kilmarnock and sheriff principal to grant a repossession order in favour of Swift Advances plc.
The court heard that Mr & Mrs Martin had borrowed £426,000 from Swift in 2007, secured over the house, but against a background of continuing non-payment of the monthly sums Swift served calling up notices in January 2012.
The action sought power to enter possession of the subjects and exercise all rights available to the creditor, including sale. At the date of the proof, the arrears amounted to £182,500 and the outstanding balance was £638,000.
The main issues before the sheriff were whether Swift had complied with the pre-action requirements set out in section 24A of the Conveyancing and Feudal Reform (Scotland) Act 1970, as amended by the 2010 Act, and whether, in terms of the pre-condition set down by section 24(5), it would be reasonable in all the circumstances to grant the orders sought.
The sheriff answered both questions in the affirmative and found in favour of Swift, and an appeal to the sheriff principal on both issues was refused, prompting Mr and Mrs Martin to appeal to the Inner House.
The court heard that in lengthy pre-action communications the Martins’ daughter and son-in-law, Natalie and Douglas Henderson, had said they were prepared to buy the house on the basis of a surveyors’ valuation of £350,000 - well below the £750,000 value at the time of loan.
Following protracted correspondence between October 2010 and July 2012 Swift raised proceedings, despite the suggestion by the Martins’ solicitor that they would be “shooting themselves in the foot” by doing so.
The appellants argued that it was a pre-action requirement that a creditor must make “reasonable efforts to agree with the debtor proposals in respect of future payments to the creditor under the standard security and the fulfilment of any other obligation under the standard security in respect of which the debtor is in default”.
The proposal to sell the property to the Hendersons at a price determined in accordance with independent and professional advice as to the market value of the subjects was a proposal within the meaning of this pre-action requirement and Swift did not make “reasonable efforts to agree” to the proposal, it was submitted.
In any event, it was further argued that it was a pre‑action requirement that the creditor must not make an application if the debtor is taking steps likely to result in “payment to the creditor within a reasonable time of any arrears, or the whole amount, due to the creditor under the standard security, and fulfilment by the debtor within a reasonable time of any other obligation under the standard security in respect of which the debtor is in default”.
However, the judges held that there was nothing in s24A that “prevents court action if, after appropriate communications, it is clear that the debtor simply cannot comply with his obligations in full”.
Delivering the opinion of the court, Lord Malcolm said: “The pre-action requirements introduced by the 2010 Act in respect of residential borrowing are designed to ensure that there is a genuine exploration of the possibility of an arrangement being reached whereby, in due course, the default can be remedied, albeit this may require indulgence on the part of the creditor.
“The whole tenor of section 24A(3) and (4) is of discussions aimed at an alternative agreement whereby the debtor’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.
“This is consistent with the government guidance, which provides assistance on what the reasonable creditor is expected to do, for example, extend the repayment period; change the type of repayment from interest plus capital to interest only; or capitalise the arrears on the security. If a court action is raised, the guidance provides that the creditor must be in a position to establish that he has complied with the pre‑action requirements.”
The judges observed that Swift was essentially presented with a “take it or leave it” offer.
Lord Malcolm added: “In the course of the extensive negotiation between the solicitors for the parties, at no stage were Swift presented with a proposal which involved an alternative method of repayment of the defender’s debts in full – nor, in the circumstances, could there be such a proposal. What was done far exceeded anything required to meet the needs of section 24A. It follows that there was no bar to the raising of the current court proceedings.”
On the issue of whether it was reasonable in the circumstances of the case to grant decree, in terms of section 24(5) of the 1970 Act, the judges concluded that the submissions on behalf of Swift were “well founded” and that there was “no sufficient reason to interfere with the decisions in the courts below”.
Lord Malcolm said: “In the whole circumstances, including the pre‑action correspondence summarised earlier, it cannot be said that it would be unreasonable for the court to sanction possession of the subjects and their sale on the open market by Swift.
“As discussed earlier in the context of the other grounds of appeal, the changes introduced by the 2010 Act were not designed to limit a creditor’s contractual entitlement to recover the full debt, nor to prevent steps designed to maximise the recovery. The 2010 Act protected against unreasonable conduct adopted by a creditor in pursuing that objective.”