by Joshua Nutton, Trainee Solicitor 

The Standard Security is of vital importance as it is the primary means by which individuals are able to obtain loan finance to buy property in Scotland. It was introduced by the Conveyancing and Feudal Reform (Scotland) Act 1970 following the Halliday Report of 1966 that recommended that the law should be simplified and the existing forms of heritable security should be consolidated. The 1970 Act has proved largely to have been a success but as time has gone on, a number of issues have been identified.


Problems with the Current Law 

Due to changes to market conditions, to society and with the introduction of technology, the 1970 Act now has a number of flaws which has prompted the Scottish Law Commission to consider its reform. The first of these is that there has been uncertainty created over how a Standard security should be enforced in the light of recent court decisions – most notably RBS v Wilson [2010] UKSC 50. Furthermore, more clarity on how they should be transferred and the effect of such transfer is needed as well as how a non-monetary obligation should operate and its enforcement.

Other issues with the current law is that aspects of the 1970 Act are more complex than is necessary, a prime example being the number of different statutory forms in the Schedule. The law on heritable securities is also fairly inaccessible as it is not confined to the 1970 Act alone with numerous other relevant provisions scattered across legislation elsewhere. Lastly, the 1970 Act was drafted at a time before conveyancing work had become divided among the specialisms that we have today. It was also created in an era that pre-dates digital technology.

 

Proposals 

The Commission is describing their proposals as evolutionary as opposed to revolutionary. They propose that the 1970 Act be repealed and replaced but that many of its core features should remain. The name “Standard Security” will continue to be used and it will remain as the only form of heritable security. The main changes proposed are summarized briefly as follows:

 
The Parties to the Security 

The Grantor should not necessarily be the same person as the debtor, nor should the grantee need to be the creditor. Third and fourth party securities are lawful.

 

Non-monetary Obligations 

A Standard Security can secure an obligation ad factum praestandum, but the 1970 Act does not provide an effective remedy for any default. The Commission proposes a potential separate reform project on the interaction of non-monetary obligations with Standard Securities.

 

Constitution of the Standard Security 

The Commission feels that matters relating wholly to the obligation between the parties should be for the parties to determine, subject to the general law. Therefore, they propose that Forms A and B be abolished and that only statutory requirements as to the information that must be contained in the deed should remain (e.g. identify the property to be encumbered, identify the secured obligation etc.).


Standard Conditions 

Schedule 3 of the 1970 Act provides standard conditions that are incorporated into every Standard Security. In reality however, most lenders vary these provisions heavily including those relating to enforcement. The Commission proposes that the enforcement rules should no longer be part of the standard conditions and instead the standard conditions should be replaced by a set of default clauses that are freely variable or simply some key rules (e.g. the debtor must insure the property).

 

Assignation, Variation and Restriction 

The 1970 Act is very brief on how Standard Securities should be transferred and case law has highlighted this uncertainty. At present, there are mandatory statutory forms required in order to assign, vary or restrict a security and the Commission propose that these be abolished. Furthermore, the effect of assignation should not limit the Standard Security to the amount due at the time of assignation enabling future advances made by the assignee to be secured as well. When an “all-sums” Standard Security is assigned, the Commission considers that it should be possible for it to secure debts due to the assignee that predate assignation.

 

Redemption and a “sunset rule” 

The Commission is keen that old forms of heritable securities and the process of redemption of securities be streamlined. They propose that there be a general rule entitling the debtor to a discharge on the debt being repaid where the creditor has disappeared or refuses to grant a discharge. The 1970 provisions on redemption needs simplification in the main; a case in point being that s.11 of the Land Tenure Reform (Scotland) Act 1974 restricts contracting out of the right to redeem in relation to private dwellinghouses. A further proposal is for there to be a “sunset rule” to be introduced for heritable securities whereby they should be extinguished after 50 years. This will also rid the register of older forms of heritable securities such as ex facie absolute dispositions,  which were common in the 1960s prior to the introduction of the 1970 Act.

 

Timescales

The Law Commission’s project on heritable securities will be carried out in stages with the first discussion paper published in June 2019 and a second discussion paper dealing with enforcement scheduled for late 2020. A final report and draft bill is expected 2022 or 2023.

Although still in its early stages, the reform of the law relating to heritable securities has the potential to have far-reaching consequences for grantors and grantees but also to third or even fourth party lenders. Above all, the focus is for a more clear and accessible understanding of the function of the Standard Security so that we are no longer thrown by judgements that alter the interpretation of the law from what had previously been the accepted understanding.


Further help 

For more information, please contact us on 0131 228 8111 or through the website.