Inner House case (for appeal to Supreme Court, see here) concerning agreements between RBS and a property developer. In July 2007 the bank and the developer entered written agreements for loans of £845k and £560k in respect of the purchase of  two plots of land at Gleneagles on which the developer was to build two houses.

The repayment date for the loans was in August 2008 and, when the developer failed to repay the loans at that date, the bank sued the developer for recovery of the funds. However, the developer counter claimed arguing that he had only entered into the loan agreements on the basis of assurances given by the Bank that it would make additional funding (of up to £700k) available to fund development on the plot and claimed damages in respect of the bank’s breach of those assurances. The assurances said to have been given by the bank included a telephone call prior to the signing of the agreements in which the developer was told that, in addition to the sums lent to buy the land, the bank would advance further “funding for the development”.

In the Outer House Lord Glennie found that bank had agreed a “collateral warranty” obliging them to lend for the development of the plots. However, the Inner House allowed an appeal finding that the telephone call only amounted to a statement of future intention and that legal obligations would only arise when the parties entered a written contract.

“If the [developer] considered that the [written agreements] did not properly reflect what he understood was to be agreed, or had been agreed orally, then he ought not to have signed the agreements. At all events, whatever the [developer] thought was the position, the informed observer would understand the written agreements to cover all matters agreed to date. It may well be that, at that time, the [bank] fully intended to enter into a further bargain with the [developer] to advance additional funding for the building works. However, they had not done so and did not do so. That may have been contrary to the spirit of the negotiations prior to the signing of the written agreements, but that spirit, or its moral content, cannot be taken as creating a legally binding voluntary obligation.”

The full judgement is available from Scottish Courts here.

(NB: See Supreme Court decision here.)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Outer House case in which Mrs Hoblyn sought reduction of a decree authorising the bank to take possession of a house occupied by her, suspension (and interim suspension) of a notice of ejection against her and interdict (and interim interdict) preventing the bank from selling the house. The Court initially granted orders temporarily suspending the eviction and preventing the sale of the house. However, the bank sought recall of those orders.

The house had formerly been the matrimonial home shared by Mrs Hoblyn, her former husband and their children but it was owned solely by Mr Holbyn. Mr Holbyn had not lived in the house since the couple separated in 1994 and he was later sequestrated. The bank, which held a standard security over the house, had taken action to repossess and sell the house after the related loan account fell into arrears.

Mrs Holbyn’s ground of challenge appeared to be that the correct statutory procedure had not been followed. She gave evidence of the actings of her former husband who she said (unbeknown to her) had acted in bad faith in his financial dealings and also challenged the good faith of his sequestration, arguing that he had arranged his own sequestration to avoid debts he had incurred.

Although Lord Drummond Young sympathised with Mrs Holbyn’s predicament and accepted that she was likely to suffer hardship, he found that she had failed to make anything approaching a prima face case. It had been clear that the bank had done everything required of it by way of service on Mrs Holbyn and procedure under the legislation. The problem was that the house was subject to a standard security in respect of a loan to Mr Holbyn and that loan payments had not been made. In those circumstances the bank was entitled to enforce the security, if necessary by repossessing the house and selling it. The fundamental objectives of the law of heritable security would be frustrated if that course were not available. Consequently, Lord Drummond Young recalled the interim suspension and interdict the court had previously granted.

The full judgement is available from Scottish Courts here.

Mrs Holbyn sought and was refused an interim interdict preventing the eviction and an appeal against that decision was also refused in the Inner House ([2014] CSIH 52).

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Inner House case of some complexity in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The Liquidator argued that the holder of the security, Foxworth (a company controlled by Mr Liu), had not acquired the rights under the security in good faith and for value. The Liquidator had previously successfully challenged a disposition by Letham Grange in favour of Nova Scotia Limited (also a company controlled by Mr Liu) on the basis that it was a gratuitous alienation. (The property which had been purchased by Letham Grange for £2,105,000 was sold to Nova Scotia for only £248,100.)

In the Outer House Lord Glennie found that there had not been a gratuitous alienation accepting Mr Lui’s evidence that the price had been reduced as there had been loans made by Mr Liu’s family in favour of Letham to finance the original purchase and that Foxworth (having assumed liability) was obliged to repay those loans to the family.

The Inner House have allowed an appeal finding that, to avoid a gratuitous alienation, the consideration given in exchange for the granting of the disposition of the resort to Nova Scotia required to be enforceable at the time when the disposition was granted. However, at that date, there was no enforceable obligation binding Nova Scotia to repay the loans to the family. Even if that had not been the case, taking account of all of circumstances, the Inner House found that the various transactions surrounding Letham Grange had been intended to defeat the claims of lawful creditors.  For those reasons a decree granting reduction of the standard security was granted.

The full judgement is available from Scottish Courts here.

(NB: See appeal to the Supreme court here.)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Sheriff Court case relating to the service of a calling up notice by sheriff officer. The notice was posted through the door by the sheriff officer having established that the debtor (Mr Stevenson) lived at the address and given 6 audible knocks (in accordance with the rules of court).

Mr Stevenson argued that, as the notice had been not served on the Defender personally and had been put through the letter box, the bank had failed to serve it properly in terms of the Conveyancing and Feudal Reform(Scotland) Act 1970 (section 19(6)). Mr Stevenson contended that the bank’s action under the 1970 Act should therefore be dismissed.

Sheriff George Jamieson found that s19(6) of the 1970 Act permits certain methods of service but does not contain exhaustive provisions on the service of calling up notices. A sheriff officer was entitled to serve the notice acting in his official capacity as an officer of court in accordance with the rules for citation set out in the relevant legislation and rules of court. Consequently, Mr Stevenson’s motion to dismiss the action was refused.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Note by Sheriff Peter J Braid relating to a case concerning a standard security over property at Mucklets Crescent in Musselburgh. The debtor had died and her estate had been sequestrated.

Following the service of calling up notices and the expiry of the notice period, Accord (the creditor) sought declarator that:

1. Miss Edwards’ representative was in default (within the meaning of standard condition 9(1)(a) of schedule 3 to the Conveyancing and Feudal Reform (Scotland) Act 1970);
2. the subjects were not used to any extent for residential purposes within the meaning of section 20(2A) of the 1970 Act; and
3. Accord had the right to sell the subjects, to enter into possession of them and exercise all other rights and powers under the standard security, in terms of the 1970 Act.

The question arose as to whether Accord was entitled to seek declarator by ordinary action or whether they were bound to proceed under s24 of the 1970 Act (which provides for certain pre-action requirements to provide protection for the debtor).

The sheriff agreed with Accord’s argument that it was not necessary to proceed under s24. In terms of s20, which contains the right of sale, “where the standard security is over land…used to any extent for residential purposes“, the creditor can only exercise its rights by proceeding under s23A (which deals with a voluntary surrender and had no application to this case) or under s24. However, in this case, the property was not being occupied by any person at the time of enforcement and, as such, it could not be said that they were being used by anyone for any purpose, let alone used for residential purposes. The point of time at which the use was to be considered was that at which the creditor wished to exercise its remedies.

The purpose of the pre-action requirements was to give the debtor information and assistance. Since there was no living debtor, nor anyone using the house for residential purposes, it would be impossible for Accord to comply with the pre-action requirements. Further, the court had no power to dispense with those requirements. The sheriff agreed that the court should therefore proceed upon the basis that residential protections did not apply, meaning that the action should continue as an ordinary action with no pre-action requirement.

The sheriff noted that infelicities in the drafting of the Act could result in problems arising where the subjects were occupied; a creditor not necessarily being in a position to know what use is being made of the subjects. Moreover, there may be cases where the debtor has died but the subjects are still being used for residential purposes. The question would then arise as to how a creditor is to comply with the pre-action requirements.

The full note is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Outer House case concerning a creditor’s right of sale over security subjects held under a standard security. The syndicate financed the purchase of a site at Eurocentral near Motherwell, on which a hotel and office complex (which remained unoccupied) were constructed, partly by means of a loan secured by a standard security.

The syndicate failed to make payments under the loan agreement and Hadrian (the holder of the security) demanded payment of the loan, served a calling up notice on the syndicate and began to market the subjects. Hadrian received an offer from the hotel operator for £5m and another offer from Calgacus Capital Limited (a wholly owned subsidiary of Hadrian) for £5.2m. The effect of the proposed deal with Calgacus would have been that (i) the syndicate’s members would have incurred a balancing payment of £2.3m in respect of capital allowances (which the syndicate argued would not have been triggered under the hotel operator’s bid) and (ii) that the syndicate would have been left owning the unoccupied office premises.

The syndicate sought interim interdict preventing the sale to Calgacus on the basis that the subjects had not been advertised properly. They also argued that (in engineering a bid from its own subsidiary which would result in a balancing payment) Hadrian had improperly used the procedure to apply commercial pressure to the syndicate to pay more towards their outstanding debt than the loan agreement provided for.  (The loan agreement prevented recourse to the personal assets of the members of the syndicate.)

Lord Hodge rejected the syndicate’s motion for interim interdict finding that the syndicate’s challenges in respect of both the advertising of the property and the improper use of powers were weak.  Also, if a more cogent case could be made successfully at a later stage, the syndicate would be entitled to an adequate remedy in damages.  In coming to this conclusion, Lord Hodge noted that the financial loss to the syndicate would have been greater than that of Hadrian if the interim interdict were not granted. However, Lord Hodge also took account of the fact that the syndicate’s members had decided they were not prepared to contribute further funds or buy a variation of the loan agreement when exposed to the tax clawback. In the absence of a clear legal wrong it was not appropriate to prevent Hadrian proceeding with the sale to Calgacus.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Application for an administration order in respect of FM Front Door Ltd. The application followed FM’s failure to make payments under a loan from the Dunfermline Building Society obtained to assist with the purchase of flats at the Skyline development on Finniestoun Street in Glasgow.  The loan was secured by a floating charge and standard securities over each of the flats. FM’s parent company FM Developments also granted a guarantee for the loan.

Clause 13 of the loan agreement provided that the grounds for default included:

1. failure to pay sums due under the loan agreement;
2. inability to pay debts as they fall due (or deemed inability in terms of the Insolvency Act 1986); and
3. circumstances arising, which in the opinion of the building society, had a materially adverse effect on the ability of FM to perform it’s obligations under the agreement or on the value, validity and enforcement of the security or the security documents.

In terms of the loan agreement, FM were to make quarterly payments to the building society. They failed to do so timeously (in respect of payments due in July and October 2010 also January and April 2011) but on each occasion paid after they were sent reminders by the building society which noted the sum due and the bank account to which it was to be paid. However, when FM again failed to pay the sum due in July 2011, the building society wrote to FM indicating that they were in default and demanding payment of the principle sum with interest.

The defaults on which the building society sought to rely were the late payment of the July instalment, a reduction in the value of the property which in its opinion constituted a materially adverse effect on both FM’s ability to perform its obligations under the loan agreement and also on the value of the securities.  It also took the view that the administration of the guarantor, FM Development materially affected the value of the guarantee.

FM argued that it was not in default contending that the parties had varied their contract so that FM did not have to pay the quarterly instalments of interest until the building society had informed it of the sum due and the bank account into which the sum should be paid. Further, FM claimed that the building society had acquiesced in late payment and was personally barred from founding on the delayed payment in July.

Lord Hodge rejected these arguments and granted the administration order sought by the building society.

In terms of the Insolvency Act 1986, before a court can grant an administration order, it must be satisfied that:

1.  the company is or is likely to become unable to pay its debts; and
2.  the administration order is reasonably likely to achieve the purpose of the administration. 

Default
Variation of the contract
Lord Hodge was not persuaded that the email correspondence vouched for any variation of contract. It was consistent with the building society politely reminding its borrower that sums were overdue and pressing for payment. It did not establish the agreed practice claimed by FM. Also there was no suggestion that, before the default, anything occurred to cause uncertainty as to the amount due for quarterly payment. On the contrary, the sum due in each quarter remained the same and the bank account into which it was to be paid did not change. 

The loan agreement also contained a “no waiver” clause to the effect that failure or delay on the part of the building society to exercise powers or rights under the agreement did not preclude further exercise of the powers or rights. Whilst there is some uncertainty as to the boundaries of the efficacy of “no waiver” clauses, the effect of the clause was that FM could not found on a failure by the building society to assert a default when there had been a delay in making a quarterly payment in order to argue that the building society could not give notice of a default on the occurrence of a further failure to make a payment. Personal bar seeks to prevent unfairness caused by inconsistent behaviour. But in this case FM had to be taken to have been aware of the clause and thus to have known that a failure by the building society to exercise a right or remedy did not amount to an abandonment of that right on a later non-performance.

FM was therefore in default when it failed to make the payment on 1 July 2011. 

Materially adverse effects under clause 13
Lord Hodge was also satisfied that the building society has established a default under clause 13. The insolvency of FM’s guarantor, FM Developments was likely to have had a material adverse effect on the value of its guarantee.  Further, the building society was entitled to take the view that the fall in value of the flats which FM acquired was likely to have a material adverse effect on the value of its standard securities and on FM’s ability to repay the advances.  Whilst both parties relied on different valuations, whichever valuation was taken, it was clear that there has been a material fall in the value of the properties and that the outstanding balance of the loan exceeded their value. That was a position which was materially adverse to the circumstance in 2007 when the building society stipulated that the maximum that it would lend was 85% of the market value of the properties.

The administration order
Inability to pay debts
Having found that the building society was entitled to treat FM as being in default, Lord Hodge was satisfied that FM was unable to pay its debts as they fell due. FM’s failure to repay the principal sum in response to the building society’s demand and the evidence of the current value of its property portfolio demonstrated that inability.

The effect of the administration order
As to whether an administration order was likely to achieve the purpose of the administration, one of the two purposes which the intended administrators advanced was to make a distribution to the building society as a secured creditor. There is no suggestion that they would not be in a position to do so and Lord Hodge was satisfied that it was likely that that purpose would be achieved.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

In November 2010 the Supreme Court in RBS v Wilson found that, in any case where a creditor seeks repayment of a debt, failing which, the sale of the security subjects, it must first serve a calling up notice[1] and thereafter wait two months before repossessing the property. This was contentious as, up until the decision in Wilson, practitioners had believed that the calling up procedure was not necessary[2].

Following the Wilson case, the Scottish Government issued an informal consultation[3] on whether the decision has long term implications requiring mitigation through action of the Scottish Government. The Scottish Government has now issued a report analysing the responses.

A majority of respondents thought that there were negative impacts from the judgement and the Scottish Government should act to mitigate those. Whilst the responses revealed no clear trends, lenders and lender services focused on practical issues resulting from the increased timescales and costs involved in following the calling up procedure.  In particular the two month delay in process caused concern and some consultees also commented on a lack of clarity and consistency in the law.

However, a notable minority of respondents felt that there were no long term impacts justifying action by the Scottish Government. The Law Society of Scotland took the view that “the Scottish Government should not take any measures unless or until it is clear that there are long term impacts which require to be addressed.” Professor Gretton saw no reason for emergency legislation pointing out that the calling up procedure was not unreasonable (indeed it was probably what had been intended when the 1970 Act had been drafted) and the 2 month ultimatum procedure not excessively long. He also referred[4]  to the Scottish Law Commission’s imminent project on heritable securities which includes enforcement and saw no need for an additional review. Although the decision caused some problems for enforcement proceedings in hand at the time the decision came out, Professor Gretton noted that most had already sorted themselves out and the rest would do so fairly soon.

A summary of the responses is available here.

A full analysis of the responses is available here.

Sheriff Court case concerning the competency of service of a calling up notice under the Conveyancing and Feudal Reform (Scotland) Act 1970.

After having failed to find Mr Gallagher, Sheriff Officers instructed by Santander, purported to serve the notice on Mr Gallagher by putting it through his letter box.

Santander sought to argue that service in this way satisfies s19 (6) of the 1970 Act which says:

“For the purposes of the foregoing provisions of this section, the service of a calling-up notice may be made by delivery to the person on whom it is desired to be served or the notice may be sent by registered post or by the recorded delivery service to him at his last known address, or, in the case of the Lord Advocate, at the Crown Office, Edinburgh, and an acknowledgment, signed by the person on whom service has been made, in conformity with Form C of Schedule 6 to this Act, or, as the case may be, a certificate in conformity with Form D of that Schedule, accompanied by the postal receipt shall be sufficient evidence of the service of that notice; and if the address of the person on whom the notice is desired to be served is not known, or if it is not known whether that person is still alive, or if the packet containing a calling-up notice is returned to the creditor with an intimation that it could not be delivered, that notice shall be sent to the Extractor of the Court of Session, and shall be equivalent to the service of a calling-up notice on the person on whom it is desired to be served.”

Santander referred to the unreported decision Household Mortgage Corporation plc-v-Diggory (1997)in which it was found that physical delivery to the debtor was not required where service by recorded delivery post was employed.

However, Sheriff Mackie found that Santander’s calling up notice had not been competently served.  In terms of s19 (6) service can be made:

1. by delivery in person (which means the creditor has to place the document in the hands of the debtor);
2. by recorded delivery at the last known address of the debtor (no personal delivery is required and, so long as the document is not returned  with intimation that it could not be delivered, then it can be presumed to have been served); or
3. by notice to the Extractor of the Court of Session (which refers to a situation in which the notice is valid even though the debtor knows nothing about it).

Whilst service by recorded delivery does not require that the document is physically delivered, that does not mean that alternative modes of service do not require to involve physical delivery.

Sheriff Mackie also made reference to Rule 5.4 of the Sheriff Court Rules which provides that a Sheriff Officer can serve a document by depositing it at an address after making due enquiries.  She noted, however, that this only applies to official functions carried out under Act of Sederunt (Messengers-at-Arms and Sheriff Officers Rules) 1991. When serving the calling up notice, the Sheriff Officers were carrying out an extra official function (i.e. not an official function) and, as such, the calling up notice required to be served in accordance with s 19(6) of the 1970 Act.

A full report of the decision is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Complicated case in which the Liquidator of the Letham Grange Development Company sought reduction of a security over the Letham Grange resort near Arbroath. The case involves a number of companies all controlled by a Mr Liu and his family.

The grounds for challenge

The Liquidator argued that the holder of the security (Foxworth) had (1) not acquired the rights under the security in good faith and for value and (2) the security was void as it was not in the correct form.

Good faith and value

Prior to this case the Liquidator had challenged a disposition by Letham Grange in favour of Nova Scotia Limited on the basis that it was a gratuitous alienation, an unfair preference (both in terms of the Insolvency Act 1976) and a fraudulent preference at common law.  The subjects which had been purchased by Letham Grange for £2,105,000 were sold to Nova Scotia for only £248,100. The Liquidator had previously obtained a decree reducing the disposition (effectively by default when Nova Scotia failed to appear at a proof).

However, in the present proceedings Mr Liu argued that the price contained in the disposition was not the full consideration for the subjects as the price had been reduced to take account of loans which Mr Liu and his family had made to Letham Grange in order to finance the purchase. Foxworth then assumed liability to repay the loans to the family and Nova Scotia granted the standard security over the property in favour of Foxworth.

After consideration of the evidence and an assessment of the credibility of the witnesses, Lord Glennie found that the sale had been for adequate consideration and there had not been a gratuitous alienation. There had been loans by the family in favour of Letham to finance the original purchase and, although Foxworth had imputed knowledge of the facts pertaining to the sale to Nova Scotia (through Mr Liu who was in control of both companies), it did not have knowledge of any fact rendering the grant of the standard security by Nova Scotia a breach of an obligation on it affecting the property.

Form of the Security

The Liquidator argued that the security, which had been drafted by Mr Liu himself, was not valid pointing to the fact that although the deed referred to a separate personal bond (per a Form B security under the Conveyancing and Feudal Reform (Scotland) Act 1970) it failed to specify the date of the personal bond and did not include anything allowing the personal bond to be identified. Also, although the deed contained the rate of interest to be applied (per a Form A security under the 1970 Act), the personal bond did not.

However, Lord Glennie agreed with the argument that it was acceptable to rely on extraneous evidence to identify the personal bond approving the arguments put on behalf of Mr Liu to the effect that, although a standard security must comply with one of the statutory forms contained in the 1970 Act, it is sufficient compliance that the deed complies “as closely as may be” and some latitude may be allowed.

Lord Glennie noted that in effect the security had been a hybrid between Form A and Form B but found there was no difficulty in a security granted in hybrid form.

The full judgement is available from Scottish Courts here.

(See Inner House decision here and appeal to the Supreme court here).

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.