Repossessions in Scotland affected by Northern Rock ruling

20 March 2012

A ruling at Glasgow Sheriff Court has dismissed as incompetent an action that was taken by Northern Rock (Asset Management), because they had failed to correctly follow the steps required to be made by a lender before they could repossess a property.
This has already affected other repossession actions. Our Gus Macaulay has acted for several large banks and many homeowners in hundreds of repossession cases and had predicted this latest development.
The phrase ‘defaulting on a mortgage’ is commonly heard, and the meaning of ‘default’ and exactly when that occurred was central to the outcome in this case. The law is mainly set out in the Conveyancing and Feudal Reform (Scotland) Act 1970. A lender may wish to repossess a property when a homeowner has not being making the required repayments. This is done by the bank issuing a ‘calling up’ notice. Previously, the vast majority of lenders (and their legal advisors) thought the 1970 Act gave a number of options to proceed to getting an order for repossession. The RBS v Wilson case we previously reported on challenged that approach and stressed the importance of the calling up notice. This notice gives the homeowner two months to make payment of everything outstanding in full.
However, the introduction of the Home Owner and Debtor Protection (Scotland) Act 2010 must also be taken into account by lenders.  The ‘Pre-Action Requirement’ is a key part of that Act. Lenders must follow the Pre-Action Requirement protocol laid down by the legislation in order to give borrowers all possible opportunities to meet their obligations and make repayments, before they can raise repossession proceedings.
The Pre-Action Requirement protocol that banks must follow is laid down in section 4 of the 2010 Act. If a debtor is likely to be able to make payment when notice is given, a lender must allow them to do this. Generally, the lender must:
•provide the debtor with clear information about the terms of the standard security, the amount due (including any arrears and charges in respect of late payment and redemption) and any other obligation under the security in respect of which the debtor is in default;
•make reasonable efforts to agree with the debtor proposals for future payments and the fulfilment of any other obligation under the security in respect of which the debtor is in default;
•refrain from applying  for repossession or sale where the debtor is taking steps likely to result, within a reasonable period, in the payment of arrears or the principal sum and to fulfil any other obligation for which the debtor is in default;
•provide the debtor with information about sources of advice and assistance in relation to management of debt;
•encourage the debtor to contact the local authority in whose area the property is situated.
The question is, when should the Pre-Action Requirement documents be served – before or after the calling up notice? At what point is the debtor in ‘default’, allowing the repossession action to be raised?
In the latest case, the Sheriff stated that by providing the Pre-Action Requirement information following expiry of the calling up notice, it may be a way of encouraging a lender and homeowner to avoid going to court. Some lenders’ legal advisers have responded by saying that serving the Pre-Action Requirement documents before serving a calling up notice might avoid  the calling up notice procedure altogether if the matter is resolved amicably between lender and homeowner.
Ultimately, this is good news for homeowners who may be in financial difficulties and struggling to make payment, as it means the lender will have to allow the person in arrears a genuine final chance to make arrangements to pay. If the lender fails to do so, they may not have the right to attempt to sell the debtor’s home.
If you are a homeowner and do not have legal representation and wish to know your rights and remedies, please contact Gus Macaulay.

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