Lender Services Practice Group: Winter Bulletin 2018

Welcome to the Lender Services Winter Bulletin.

With a significant drop in temperature and Christmas decorations all around, there can be no denying that the holiday season is almost here.

But before we put the 'out of office' emails on, here's a short newsletter which we hope will continue to provide insight into our team and provide an update on some key developments both in Scotland and generally throughout the United Kingdom.

Legal 500

For the fourth year running, Aberdein Considine’s Debt Recovery department, consisting of our finance and banking litigation team, has been awarded Top Tier status in the new edition of the Legal 500 guide, which ranks and rates the best lawyers in the world.

In reference to our team, the Legal 500 said: "Aberdein Considine, whose team demonstrates 'excellent business acumen', is among the market leaders in the debt recovery field.” In addition, five members of the finance and banking litigation team have been specifically recognised and recommended. This includes the Head of Lender Services Practice Group, Myra Scott, along with Partners Laura Browne and Paul McIntosh, Associate Elaine Elder and Lender Services Director, Joseph Bowie.

Vulnerable customers

As a department, we have been acutely aware for some time now that the industry as a whole has been very focused on the treatment of customers in potentially vulnerable situations and we have been working hard internally on making sure that we are managing these customers sensitively and effectively.

We enlisted the help of an external trainer who delivered an NHS accredited course on ‘Mental Health First Aid’ to a selection of our team across the practice group.

Key hires

We are excited to announce that one of Scotland’s leading litigation lawyers, Euan McSherry, has recently joined Aberdein Considine as the new head of Dispute Resolution. Euan provides litigation advice to clients in the retail, food and banking sectors throughout Scotland. He specialises in commercial & corporate and property; and corporate crime. A growing area of his practice is advising clients on reputation management.

In order to continue to grow the expertise within our finance and banking litigation team, both John Di Paola (pictured) and Darren Sanders have recently been appointed.

John is an Associate in the Lender Services Practice Group and is based in the firm’s Waterloo Street Office in Glasgow, specialising in the recovery of heritable property, banking litigation and debt recovery. Darren Sanders has also been appointed Lender Services Operations Manager in our Newcastle office. Both appointments will continue to strengthen our team and allow us to provide the best service to our clients in a continually changing and complex area of the law.

Legal updates

As ever, the legal landscape for lenders has been evolving over the past few months.

Our lawyers have pulled together a selection of the most relevant developments, which you can read by clicking on the following links. We hope you find them informative.

Finally, we hope you have a Merry Christmas and a Happy New Year. We look forward to working with you again in 2019.

• Scottish Law Commission commences programme of reform on heritable securities in Scotland
• Changes to Debt Arrangement Scheme in Scotland
• Increase in access to FOS for dispute resolution of complaints
• Warning for Lenders to act after increase in long-term empty properties
• Time Orders (England and Wales)

Case Law

• Knotty problem for lenders – England and Wales

Scottish Law Commission commences programme of reform on heritable securities in Scotland

The basis of the law of mortgages in Scotland, or more correctly “standard securities” is based on the Conveyancing and Feudal Reform (Scotland) Act 1970. This introduced the right in security over the property which provides that in default certain rights can be exercised, including sale and in some exceptional circumstances, foreclosure.

Since the 1970 Act receiving Royal Assent, however, the law of standard securities and exercise of rights on default, have experienced a great deal of amendment, especially as a result of moves towards a more customer-centred regulatory regime. In particular the Home Owner and Debtor Protection (Scotland) Act 2010 brought in a number of protections.

The current law on exercising rights on default is not straightforward, and is described by the Scottish Law Commission as “complex and hard to understand”. This is in particular shown in decisions such as RBS v Wilson (2010), RBS v McConnell (2012) and NRAM v Millar (2012).

The Scottish Law Commission have for some time intended to review the law of heritable securities. Work on the project finally began in early 2018. An expert advisory group has been set up which is to meet to discuss the proposed reform. As a starting point, a Research Paper has been published by Dr John MacLeod of University of Edinburgh. The Research Paper describes and examines the law of Scotland as it has changed through history and compares the current law with jurisdictions in England and Wales, France, Germany, New Zealand and South Africa. The Research Paper has been carried out to provide inspiration for reform and to act as a useful tool to the Commission.

The next stages of the process will be two Discussion Papers (providing for consultation). The first of these due in the summer of 2019 will consider pre-default matters such as the creation and transfer of heritable securities and the obligations which they can secure. The second will review post-default matters, that is to say how heritable securities are enforced.

We are in correspondence with the Commission with the view to providing input into the reform from our Lender Services Practice Group viewpoint on behalf of our lender clients.

Changes to Debt Arrangement Scheme in Scotland

The Debt Arrangement Scheme (Scotland) Amendment Regulations 2018 (“DAS Regulations 2018”) came in to force on 29 October 2018. The purpose of these amendments was to bring the DAS scheme in to line with similar schemes in England and Wales to ensure that debt management across the United Kingdom is consistent which should mean more transparency for debtors and creditors and allow for a better understanding of the debt management position in the United Kingdom as a whole.

Increase in access to FOS for dispute resolution of complaints

The FCA have confirmed plans to extend access to the Financial Ombudsman Service to more small and medium-sized enterprises as well as to a new category of personal guarantors.

The new rules will see over 200,000 additional SMEs eligible to lodge complaints through the FOS with SMEs with an annual turnover below £6.5m and with fewer than 50 employees, or an annual balance sheet under £5m. The new rules are expected to come into force on 1 April 2019.

Chancellor Philip Hammond backed plans in his 2018 Budget for the FCA limit for compensation to be increased to £350,000. This increase is currently undergoing consultation with the FCA which closes on 21 December 2018.

Warning for Lenders to act after increase in long-term empty properties

The subject of empty and unsafe buildings has long been an issue for lenders but recently published statistics mean that exposure to financial loss could be on the increase. In many cases, lenders struggle to reconcile commercial recovery where they are faced with damaged buildings or demands for action by local authorities. Local authorities themselves are attempting to make use of empty and derelict properties and as such there is usually a good opportunity for a lender to significantly mitigate any potential loss by entering into discussions with local authorities at an early stage.

There are a number of procedural areas in which lenders could be subject to some element of risk, particularly when it comes to local authority orders.

1. Statutory Repair Notices and Charging Orders
2. Closing Orders and Demolition Orders; and
3. Compulsory Purchase Orders (CPO).

In terms of any mitigating action, it is important that lenders look at a strategic approach on how to deal with issues such as negligence claims, review of Notice and engagement with customers.

Please view the below article for more information:

https://www.mortgagefinancegazette.com/legal-news/lenders-warned-act-early-increase-long-term-empty-properties-06-07-2018/

Time Orders

What is a Time Order?

• A Time Order allows borrowers to apply to the court to reschedule a loan over a longer period and obtain more time to repay a debt.
• The court will make a Time order if it appears just and reasonable to do so but must have regard to both the borrower’s situation and the lender’s interest (s.129 (1) Consumer Credit Act 1974 (CCA)).
• If the court considers that it is just to grant a Time Order, it will specify the new terms of repayment.
• It will not be granted if the borrower cannot show that they can meet the repayments required by the court. The court will consider the whole of the outstanding amount owed, which could be greatly in excess of the amount borrowed, especially if the loan was originally to be repaid over a long period of time.
• Permits the court to vary the agreement. It can order that no further interest or a reduced amount of interest be payable so that the repayments stay within the borrower’s means without increasing the term of the loan for an unacceptable amount of time.
• Appropriate remedy where current circumstances make payment impossible but an improvement in circumstances is likely to occur – for example increased working hours.
• Borrowers can apply for a Time Orders can be issued when a default notice has been issued by the lender (pre-litigation proceedings) after court proceedings have been issued (post-litigation proceedings).

Do Time Orders apply to Regulated Mortgage Contracts?

Yes. Article 61(3)(a) of the Regulated Activities Order defines a Regulated Mortgage Contract as a contract where i) a person (the lender) provides credit to an individual or trustees ii) the obligation of the borrower to repay is secured by a first legal mortgage on land in the UK iii) at least of which 40% is used or intended to be used, as or in connection with a dwelling by the borrower.

S.126 (2) states that a regulated mortgage contract which would, but for Article (60)c (2) of the Regulated Activities Order) (exempt agreements relating to the nature of the agreement) be a regulated agreement but for the exemption in PERG 2.7.19CG(1) is to be treated as if it were a regulated credit agreement for the purposes of part 9 of CCA.

When can they apply?

As they are first charge, Regulated Mortgage Contracts are subject to the Time Order provisions set out above. A Time Order can be made in conjunction with S.136 of CCA whereby the Court can vary the terms of the credit agreement as a consequence of making a Time Order.

S.36 of Administration of Justice Act 1970 gives the court similar powers and is relied on by borrowers in first mortgage possession actions.

CCA legislation contains a provision enabling regulated mortgage contracts to be treated as if they were CCA regulated in so far as part 9 of the CCA is concerned. Therefore, regulated mortgage contracts are subject to Time Order provisions.

How can Lender’s deal with Time Orders?

In some cases, lenders may have to agree to extensions of time with borrowers as they risk the court making a Time Order which could vary the terms of the credit agreement.

Southern and District Finance Limited v Barnes [1995] – power under s.136 CCA enabled the court to vary the rate of interest and to extend the repayment period beyond the original term. This judgment also provides that the Time Order should be made for a “stipulated period on account of temporary financial difficulty”. If it is unlikely that the borrower will be able to make payment of the total debt it would be more equitable to allow the regulated agreement to be enforced.

Time Orders will only be granted if it is just and reasonable for both parties. This rule ensures that these type of Orders are not granted frequently – there has to be exceptional circumstances and evidence that future payments will be made. If there is no evidence that payments will be made in the short term, and the financial difficulty is not temporary, then lenders should object to the Time Orders being granted and insist that courts grant a possession order.

Case Law

Knotty problem for lenders – England and Wales

A judgment in the Court of Appeal has ruled in favour of two Homeowners being entitled to compensation in respect of Japanese Knotweed that had spread to and affected their property.

Lenders will generally already be on the lookout for reference to Japanese Knotweed in a Home Report prior to making a mortgage offer. However in light of this judgment, this is vitally important as it can drastically reduce the value of the property. Additionally, it can make the homeowner liable to neighbouring properties should it not be maintained properly which could potentially affect the homeowner’s ability to repay their mortgage.

Whilst the risks to Lenders highlighted by the outcome of this appeal may be uncommon, it is important that Lenders are aware of the potential risks in these circumstances as they can have a significant impact on their security and potential recovery.