Lender Services Practice Group: Winter Bulletin 2020

Happy new year to everyone and welcome to the Aberdein Considine Lender Services Winter Bulletin.

For those new to our bulletin, we aim to provide quarterly updates to all our clients which we hope will provide an insight into our team and provide an update on some key developments both in Scotland and generally throughout the United Kingdom.

• COVID-19 and the recommencement of possession action
• Debt Arrangement scheme and the Coronavirus (Scotland) Act 2020
• Breathing Space Moratorium (England & Wales)
• Electronic Signatures and HM Land Registry – what lenders need to know (England and Wales)
• WPH Developments Ltd v Young & Gault LLP (In Liquidation) [2020] SAC (Civ) 7

COVID-19 and the recommencement of possession action

Mortgage lenders have turned their attention to the recommencement of repossession litigation following the automatic stay on possession proceedings from March to October 2020 due to coronavirus. From 1 November 2020 the FCA have permitted lenders to continue with repossession litigation in appropriate cases, but have extended a ban on evictions to 31 January 2021.

Restart across the UK

The attention of mortgage lenders, borrowers and the advice sector is now turning to what happens next.

England & Wales

In brief summary, mortgage lenders will be required to undertake the following steps in order to proceed with their existing standard possession claims:

1. Reactivation Notice –a notice which requires lenders to explain that they wish to continue and explain the knowledge they have as to the effect of the Coronavirus pandemic on the borrower and their dependants.
2. Review (R) Date – this is a “new opportunity” for the borrower to obtain free of charge duty scheme advice, and for the lender and the borrower to reach agreement with the assistance of the duty adviser. Lenders are required to file an electronic bundle before the R Date and be available to discuss the case by telephone with the defendant or a duty scheme (or other) adviser. A 5 minute Review appointment will be listed by the Court. This will be conducted by a Judge on the documents and without attendance by the parties. No court fee will be payable in relation to a Review or any order made on the Review Date.
3. Substantive (S) Hearing – at the S Hearing, all parties must attend and the Court will decide the claim or give further case management directions. This is akin to a “standard” Part 55 possession hearing.
4. Evictions – Notice of eviction, of at least 14 days, is now required both in the County Court and in the High Court and a new form now provides clearer information to the borrower of the date of the proposed eviction, the right to apply for suspension or postponement, and of available routes to advice.
5. Listing Priorities – written Listing Priorities have also been published, prioritising certain types of cases in the listing of court hearings. The following may concern mortgage lenders: allegations of anti-social behaviour or domestic violence, fraud or deception, unlawful sub-letting, trespassers, abandonment or death of the defendant.
6. Mediation Pilot – case may be referred to a mediation pilot scheme which is free of charge and will require attendance of the parties for up to 1 hour for a voluntary telephone/video mediation.

Scotland

In Scotland, ongoing possession proceedings have been sisted (stayed) at the court. Through discussions with the Scottish Courts and Tribunal Services, the Courts have agreed that the following steps should be undertaken by lenders:

1. Request – ongoing possession proceedings can be “restarted” at the request of the lender. There is no prescribed form of request; in some instances a formal motion to recall the sist may be required at the request of the Court.
2. Hearing – a hearing date will be set which will need to be intimated on the customer in the usual way.

At present, there are no specific requirements to provide the Scottish Courts with information as to the circumstances of the customer with regard to COVID-19. The test for granting the order will be a reasonableness test. Most lenders should consider it prudent to advise the Scottish Courts of similar information as to the impact of COVID-19 supplied in the other jurisdictions.

Northern Ireland

In brief summary, mortgage lenders will be required to undertake the following steps in order to proceed with their existing standard possession claims or “stayed actions”:

1. Reactivation Notice – prepare a notice which confirms that the party lodging it wishes the case to be listed, relisted or heard.
2. Affidavit – 21 days prior to the Initial Review (see below) or first hearing date, the party reactivating the action must file and serve an affidavit explaining what knowledge they have as to the effect of the pandemic on the defendant and their dependants, and provide information as to arrears, circumstances (including shielding) and any payment deferral. The other party can serve a replying affidavit if they do not agree.
3. Initial Review – the Master will review the case remotely without the attendance of the parties and issue further directions or list a hearing.
4. New actions – the position on new actions is that new business can be issued, however, at present hearing dates may only be sought in urgent cases. It is anticipated that this restriction on hearing dates will be lifted in due course but there is currently no timescale on that happening.

How will this work in practice?

It is clear that the courts across the UK will have to deal with a large backlog of possession claims, from mortgage lenders and the rented/landlord & tenant sector. Claims that have been on hold since March 2020 will need to be resumed, unless arrangements have been reached.

The courts are, as much as possible, “gearing up” for an increase in case numbers across the UK. In addition, steps are being taken to utilise remote hearings and, where physical attendance is needed, to ensure the safety of staff and court users with regard to social distancing and hygiene. Only time will tell if these steps are enough and whether the system can cope.

Lenders have difficult decisions to make and must decide on their strategy on forbearance generally and on contacting customers who have had possession claims stayed and in many cases may have been subject to mortgage payment holidays. The FCA has published guidance for firms on its expectations on this front.

There appears to be consensus in the sector that we will see an increased rate of borrower default and an increase in repossession actions. The challenge for mortgage lenders and their representatives will be balancing the needs of borrowers faced with financial hardship, with the need to take action on accounts that are not viable in the long term. This is a difficult balancing act in normal times, the added pressures caused by the largest public health emergency in living memory will serve to make it even more difficult. Nevertheless, focus must remain on understanding customer circumstances and enabling positive customer outcomes.

Debt Arrangement scheme and the Coronavirus (Scotland) Act 2020

The Debt Arrangement Scheme (DAS) was introduced by the Debt Arrangement and Attachment (Scotland) Act 2002 and has been amended on six occasions, most recently in 2019. However, the recently enacted Coronavirus (Scotland) Act 2020 has introduced some changes to the moratorium period available to debtors.

What is the DAS?

The scheme was set up with the primary aim being to allow debtors with a regular income a vehicle to repay their debts without the threat of enforcement action being raised against them.

Under the DAS, a debtor sets up a statutory defined debt repayment programme known as the debt payment programme (DPP). A DPP collates all secured and unsecured debts into ‘one manageable repayment’ with the debtor making only one regular payment into the DPP, which is then divided up and sent to their creditors. Any interest and debt charges in respect of the debt is suspended during the DPP and then cancelled when it is complete. This means that you once the DPP is complete, the debtor has cleared their debts and no further charges can be added.

Moratorium and the Coronavirus (Scotland) Act 2020

A moratorium is a six week period of debt relief during which creditors cannot take any action against a debtor for debts they owe them.

If a debtor was thinking of applying for a DAS, required more time to consider matters but was concerned about what creditors would do meantime, they can apply for a moratorium to allow them the time before making a decision.

If a moratorium is granted, the Accountant in Bankruptcy (AiB) will register this on the Register of Insolvencies and the DAS Register. Prior to the 2020 Act, once the moratorium has been granted, the debtor normally has six weeks to decide if they want to proceed with an application. During this six week period, creditors cannot take any action against the debtor and all interest, fees and charges on the debts are frozen. Should the debtor then decide not to proceeds with the application, all frozen interest, fees or charges will be added back onto the debt. Prior to the 2020 Act, the regulations stated that a debtor could not be granted a moratorium if they have had another moratorium granted within the last 12 months, unless they have been in a joint Debt Payment Programme in a DAS which has been revoked.

However, the 2020 Act has made some changes to the moratorium period by extending the 6 week period to 6 months. In addition to this, the limitation on multiple applications during any 12-month period has been suspended. Essentially this means that creditors may have a 6 month period whereby they cannot take any action against a debtor and all interest fees and charges are frozen on debts due. Should a debtor look to apply for a moratorium, we can advise accordingly on the impact this will have in respect of the debts due.

Breathing Space Moratorium (England & Wales)

A statutory instrument to establish a debt respite scheme comes into force on 4 May 2021 - Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020. This follows a HM Treasury consultation on a “breathing space” scheme. The Regulations make provision for two types of moratorium available to eligible debtors in England or Wales: a breathing space moratorium and a mental health crisis moratorium.

General Provisions

The list of qualifying debts includes: sums which a debtor is due to pay under a warrant for possession of residential or business premises, sums owed under a court judgment, a liability under a controlled goods agreement and debts owed to the Crown.

Non-eligible debts include: secured debt which does not amount to arrears (the arrears being the qualifying debts), non-eligible business debt and any debt which a debtor incurred by means of fraud.

The Two Types of Moratoria

A Breathing Space Moratorium

This moratorium generally lasts for 60 days. A debtor can apply to a debt advice provider for a breathing space moratorium having first obtained advice. The debt advice provider must consider eligibility criteria. There are a number of things that the advisor must take into account, including whether the debtor: has sufficient funds/income to discharge their debt as it falls due, would benefit from a debt solution and whether the moratorium is necessary to provide time to assess which debt solution may be appropriate.

An official register will be kept and creditors will be notified.

There is a mechanism for an additional debt to be included in the moratorium where identified within 45 days from the start.

The moratorium lasts for 60 days unless brought to an end early under any relevant provisions. A midway review must be conducted by the debt advice provider between day 25 and 35 which could result in a cancellation of the moratorium in some circumstances.

A Mental Health Crisis Moratorium

This moratorium lasts for 30 days after the date on which the debtor stops receiving mental health crisis treatment relating to serious mental health issues.

The debtor can apply for the moratorium themselves or by carers or health professionals. Where a debt advice provider is considering an application for such a moratorium, in addition to the usual considerations, the debt advice provider must obtain information as to the financial standing of the debtor from at least one credit reference agency.

Generally the moratorium lasts for 30 days after the date when the debtor stops receiving mental health crisis treatment unless brought to an earlier end in line with the requirements of the regulations.

Effects of the Moratoria

Once there is an effective moratorium there are a number of steps which a creditor cannot take. These include: requiring a debtor to pay interest, fees, penalties, and charges that accrue during the moratorium period and taking steps to collect the debt, commencing legal proceedings, enforcing a judgment or enforcing security.

It should be noted that, for secured debts, the prohibition on charging interest only applies in relation to arrears, and ongoing liabilities should be maintained. Provisions have been made within the regulations to extend limitation periods which expire during, or shortly after, the moratorium period (within 8 weeks beginning with the day on which the moratorium ends).

Pre-Existing Legal Proceedings

Where there are legal proceedings in existence at the date of the moratorium, the creditor will be required to notify the court or tribunal, but proceedings may continue until the Court makes an order or judgment in conclusion of the action. However, no enforcement action should be taken or continued during the moratorium period.

Debtor’s Obligations

There are obligations on the debtor, they must: provide accurate information, not deliberately withhold relevant information, notify the debt advice provider of material changes during the moratorium period, make payments of ongoing liabilities and not obtain additional credit exceeding £500.

What does this mean for Mortgage Lenders?

Secured debts are excluded from the Regulations but non-capitalised arrears are included. So a customer in arrears on their mortgage will be entitled to a breathing space moratorium in relation to their arrears but, they must still make mortgage repayments during the moratorium period.

In relation to non-capitalised arrears, a lender is prevented from taking are any steps to require a debtor to pay interest accruing on such arrears or paying any fees, penalties or charges that accrue during a moratorium period.

A lender may not contact a debtor for the purpose of enforcement of a moratorium debt. A mortgage lender cannot start any action or legal proceedings during the moratorium period. Unless the court gives permission.

However, a lender may continue existing legal proceedings during the moratorium period up to the point of judgment/order. But then they may not start action to enforce any order during the moratorium.

Questions still remain…

It is unclear whether debt advice providers are geared up to cope with a large increase in referrals or what will happen if they are unable to comply with the timescales. There are also questions over what will happen if the creditor does not receive notice of a moratorium and continues with action. Or what factors the court will consider in making an order to allow proceedings to be commenced during a moratorium. Before May 2021, all lenders will need to revise their system to ensure that: (1) moratoria are understood, records updated, staff and agents are provided with relevant information; (2) customers are not contacted regarding the debt during the period of the moratorium; (3) no prohibited action is taken during a moratorium; and (4) no interest, fees and charges accrue during the moratorium.

Electronic Signatures and HM Land Registry – what lenders need to know (England and Wales)

Prior to the Covid-19 outbreak, documents submitted to HM Land Registry had to be signed manually in wet ink. The effect of the Covid-19 outbreak has accelerated HM Land Registry efforts to accept documents for registration that have been signed electronically.

The “Mercury signing” method

From 4 May 2020 HM Land Registry accept deeds that have been signed using the “Mercury signing approach”.

Those deeds which can be mercury signed applicable to transactions we deal with are as follows (parties must be represented by a conveyancer):

• A deed that effects one of the dispositions referred to in section 27 (2) and (3) of the LRA 2002 (those that are required to be completed by registration)
• A discharge or release in form DS1 or DS3

The following steps will need to be taken in respect of remortgages and transfers of equity:

1. Each party prints the signature page.
2. Each party then signs the signature page in the physical presence of witness.
3. The witness signs the signature page.
4. Each party sends a single email to their conveyancer attaching the final agreed copy of the document and the signed signature page.
5. Post completion, the conveyancer applies to register the disposition and includes with the application, the final agreed copy of the document. The conveyancer must ensure that they certify the resulting document as a true copy of the original.
6. The application is then processed by HM Land Registry.

For more information in respect of this, please read the full article on the link below:

WPH Developments Ltd v Young & Gault LLP (In Liquidation) [2020] SAC (Civ) 7

It seems clear that the law of prescription in Scotland has changed significantly over the last few years. In past newsletters, we have discussed the various changes in this field, most notably in the legal field of professional negligence, and it seems this is continuing to change.

This change is likely to come from the case of WPH Developments Ltd v Young & Gault LLP (In Liquidation. The case originally called in the Sheriff Courts where the Sheriff made a decision that the claim in question had not prescribed and should be allowed to proceed to a hearing on the evidence.

In the original calling of the case, the Sheriff had to consider whether or not the Pursuer’s obligations had extinguished under the Prescription and Limitation (Scotland) Act 1973 section 6(1) five year short negative prescription period.

The Pursuer had relied on erroneous drawings drawn up in 2012 by an architect (Y&G) and incurred expenditure to contractors who built upon land which the Pursuers did not own. The Pursuer had contractors build a housing estate in reliance on those plans. In 2014, it emerged that the estate was built partially upon neighbouring land.

On the facts alleged by the Pursuers, the relevant works commenced more than five years prior to the action being raised. However, the Sheriff considered that the prescription date could be postponed in terms of section 11(3) of the 1973 Act and that the knowledge of loss should not be considered with the benefit of hindsight. He considered the claim had not prescribed and allowed the case to proceed to a hearing on the evidence. This was appealed by the Defenders.

The appeal by the Defenders has been remitted to the Court of Session because it concerns complex points of law on the correct interpretation of the Prescription and Limitation (Scotland) Act 1973 section 11(3). Whilst there are no material updates arising directly from this appeal judgment, the impact of this is likely to be significant. It now gives an opportunity for the case to go to the Supreme Court if necessary; and for the law of prescription to be considered once more. Most importantly, it would allow the question of knowledge of loss to be considered in more depth. We shall continue to monitor the outcome of this appeal and keep you informed of the developments.