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Mortgage repossession – when is a borrower’s proposal reasonable?

Posted on Dec 09, 2015 by Lynne Arnott  | 0 Comments

The main issues before the Inner House were whether Swift had complied with the necessary pre-action requirements under Section 24A of the Homeowner and Debtor Protection (Scotland) Act 2010 before commencing repossession and whether it was reasonable, in the circumstances, for the court to grant decree for repossession of the property.

These pre-action requirements oblige the creditor:

  1. to 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”; and
  1. not to make an application for repossession if the debtor is taking steps likely to result in (a) payment to the creditor within a reasonable time of any arrears, or the whole amount, due to the creditor under the standard security; and (b) 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.

The Martins property formed part of a larger property, the other part of which was owned by their daughter and son-in-law (the Hendersons). Discussions took place between the Swift solicitors and the Martins solicitors regarding a sale of the security subjects to the Hendersons who had offered to purchase the property for £300K (based on a valuation obtained in July 2010). However, Swift were concerned at this low valuation when the property had been valued at £750K at the time of the loan 3 years previously and also because the outstanding debt was approaching £700K. There were also alleged problems with access to the Martins property (in that access to it depended on the consent of the owner of the Hendersons’ property). Swift’s solicitors were unsuccessful in obtaining the original title deeds from the Martins solicitors (which were held by the holder of a prior security) to investigate the position regarding access and to assess what effect it would have on the valuation. Meanwhile the Martins solicitors repeatedly sought to insist that Swift accept the Henderson’s proposal to purchase the property for £300K. Given that no real progress was being made, Swift resumed court proceedings for repossession of the property.

The Martins argued that Swift had breached the pre-action requirements above by not making reasonable efforts to agree to their proposals to sell the property to the Hendersons and by taking steps to repossess the property while they were proposing to sell to the Hendersons.

Those arguments were rejected by the Inner House which upheld the findings of the Sheriff Principal to the effect that the pre-action requirements are aimed at protecting a debtor against a creditor which takes action rapidly following a debtor’s default without communicating with the debtor and without making any concessions to allow the debtor to remain in occupation of the property with an adjusted payment regime. In this case it was held that whilst both parties had made reasonable efforts to reach an agreement, those efforts had failed and Swift had complied with the pre-action requirements. The Inner House also upheld the finding that the proposed private sale to the Hendersons was not a “reasonable step” sufficient to prevent Swift from proceeding with repossession.

The Inner House concluded that there is nothing to prevent a court action being raised if, “after appropriate communications, it is clear that the debtor simply cannot comply with his obligations in full. 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.”

The Inner House also concluded that there was no sufficient reason to interfere with the former decisions of the Court and that, in the whole circumstances, including the pre‑action correspondence, it was reasonable for the Court to sanction possession of the subjects and their sale on the open market by Swift.

This case clarifies that the pre-action requirements do not prevent reasonable lenders from recovering their debts in full, nor are they being obliged to accept proposals which limit that entitlement and prevent them taking steps to maximise their recovery. This decision will be welcomed by lenders and their agents alike in bringing clarity to what amounts to reasonable conduct and compliance with the pre-action requirements.

Contact MBM Commercial LLP

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