Enforcing security over land and buildings
Like a mortgage in England, a standard security is the legal document that secures a loan over heritable property (i.e., land and buildings). It was created under the Conveyancing and Feudal Reform (Scotland) Act 1970 (the "1970 Act"), which sets out the rights and liabilities of the lender and the debtor.
Broadly speaking, if a debtor fails to make payment of the sums due under the loan, a creditor can take enforcement action by 'calling-up' its security. This is done by serving a 'calling-up' notice on the last person holding the legal title to the secured property ('the proprietor'). If the property is residential in nature, a copy of the calling- up notice must also be served and addressed to 'the Occupier'. The calling-up notice requires the debtor to discharge the debt secured by the security, with interest, within two months of service. If the debtor fails to comply, they are in default and the creditor can take steps to exercise the remedies available to them under the 1970 Act. In most circumstances, the creditor will wish to repossess the property with a view to sale. That brief description only scratches the surface, however, and the law regarding standard securities and their enforcement has become increasingly complex over the last 15 years.
An 'Entitled Resident'
Various amendments have been made to the 1970 Act, most notably through the Home Owner and Debtor Protection (Scotland) Act 2010 ("the 2010 Act"), which introduced a number of protections for debtors. If a property is used "to any extent" for residential purposes, the creditor must raise court proceedings to obtain a judgment authorising them to take possession of the secured property. Furthermore, the 2010 Act obliges creditors to comply with certain Pre-Action Requirements before undertaking enforcement action.
Unlike most ordinary court actions in Scotland, in residential standard security enforcement cases, the court will automatically fix a hearing before reaching a decision, even where the case is not defended. The court must then only grant a judgment if it considers it 'reasonable' in the circumstances, having regard to various factors. Representations to the court are normally made by or on behalf of the debtor. However, the 2010 Act made it possible for a person who is not a party to the court proceedings to enter the process and seek relief if they qualify as an 'entitled resident'. The term covers a person whose sole or main residence is the secured property and who is either:
- the proprietor of the secured property (where the debtor and owner are not the same person);
- a non-entitled spouse or civil partner of the debtor or owner where the secured property is a matrimonial or family home;
- a cohabitant of the debtor or owner; or
- a cohabitant who has lived with the debtor or owner for at least six months prior to the end of the relationship and who continues to live there with a child of the relationship aged under 16.
A person who lives with the proprietor of the secured property as husband and wife qualifies as an 'entitled resident' under the 1970 Act.
When court proceedings are raised by a secured creditor, an entitled resident can apply to the court to continue proceedings or make any other order as the court thinks fit. Crucially for the purposes of this case, they may also ask the court to recall a judgment previously made in the secured creditor's favour.
The Sheriff Court Action
Soofi, Appellant [2024] SAC (Civ) 44
In Soofi, the debtor died in October 2016. The executor was the debtor's son. The executor, his wife and their children resided in the secured property, which was in Glasgow. Before the debtor's death, the secured creditor, Santander UK plc, had raised an action for recovery of possession. A judgment for ejection was eventually granted in 2018.
The executor's wife (the Appellant) sought to recall the judgment. She argued that, as the secured property was her main residence and she was a non-entitled spouse, she qualified as an 'entitled resident' and could recall the judgment. The Sheriff rejected her application as incompetent, finding that while the term 'debtor' in the 1970 Act extended to an executor, an executor acts as a trustee of the deceased's estate, subject to the rights of creditors upon that estate. The executor does not obtain any personal or proprietary rights upon their appointment to office. That being so, the spouse of an executor could not be regarded as an 'entitled resident' in terms of the 1970 Act.
The Appeal
The Appellant argued that the Sheriff had erred in his approach to the terms 'debtor' and 'proprietor' under the 1970 Act and had crossed the boundary between construction and interpretation of legislation. It was argued that Parliament had intended to extend the protection afforded by the 1970 Act to the widest class of persons. The term 'debtor' should include any successor in title, assignee or representative, with the latter including an executor. Accordingly, an executor was a proprietor, and any undesirable consequences of a more expansive interpretation were for Parliament to address. Furthermore, as an entitled resident was defined to include the non-entitled spouse of the debtor or proprietor, it followed that the non-entitled spouse of the executor must also qualify.
Having considered the well-established principles of the role of an executor, and confirming that an executor did not acquire any rights to the deceased's estate for their own personal benefit, use or enjoyment, the Sheriff Principal held that the Sheriff was correct to conclude that the application was incompetent.
The Sheriff Principal noted that while the term 'proprietor' was not defined within the 1970 Act, the natural and ordinary meaning of the term refers to one who enjoys an exclusive right of ownership. That is personal to the owner who (amongst other things) can transfer title or burden property at their own will. The term 'proprietor' did not include rights granted to those who occupy an office such as an executor. The core role of an executor is to administer the deceased's estate by ingathering and distributing property to those with a right to it, namely the beneficiaries. An executor was neither entitled nor permitted, simply by taking up the role, to occupy property belonging to the deceased and use it for their personal benefit as a family residence.
In addressing the Appellant's argument that Parliament had intended to extend the protections afforded by the 1970 Act to the widest class of persons, the Sheriff Principal accepted that may be so. However, the crucial point was that the class of persons who enjoy the protection afforded by the Act only do so by virtue of a relationship of marriage with the individual who is actually entitled (or permitted by a third party) to occupy the secured property. The 'entitled spouse' in this case was the deceased and the Appellant had no relationship of marriage with the deceased.
In summary, the Sheriff Principal commented that if the Appellant was successful, it would lead to "manifestly unfair or unreasonable" results. Most notably, an executor who occupies a property belonging to the deceased would likely be acting in breach of their duty to administer the estate for the benefit of the beneficiaries.
Comment
The Sheriff Appeal Court was clear that the term 'entitled resident' is limited in scope and does not extend to spouses of executors. An executor does not gain any beneficial rights by virtue of their appointment, so it must follow that neither can their spouse.
Furthermore, if the court were to find that the spouse of an executor could qualify as an 'entitled resident', it would create practical problems if multiple executors were appointed. There would be no guidance or clarity on how to deal with competing claims to a right of occupancy. As the court correctly pointed out, in the absence of a clear intention on the part of the legislature to extend occupancy rights to executors and, in turn, their spouses, the expansive interpretation contended for by the Appellant could not be supported.
The decision will be of relief to creditors, who have had to navigate a number of changes to the law in enforcing standard securities in recent years. There are also likely to be further changes following the Scottish Law Commission's discussion papers on aspects of heritable securities over the past few years.
Enforcing standard securities can be complex, and creditors ought to be aware of their rights and obligations throughout every stage of the process. A simple oversight can mean starting the whole process again. If you are a creditor seeking advice on any aspect of enforcement of a security, our expert team would be happy to hear from you.
