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WESTFOOT INVESTMENTS LIMITED against EUROPEAN PROPERTY HOLDINGS INCORPORATED  

2015SCEDIN58

 

SHERIFFDOM OF LOTHIAN AND BORDERS AT EDINBURGH

 

B987/14

 

Summary Application under the Conveyancing and Feudal Reform (Scotland) Act 1970 – Section 24 and the Heritable Securities (Scotland) Act 1894

 

Judgment of Sheriff T Welsh QC

 

in causa

 

WESTFOOT INVESTMENTS LIMITED, Unit Six, Acorn Business Park, Woodseats Close, Sheffield, S8 0TB.

PURSUER

 

against

 

EUROPEAN PROPERTY HOLDINGS INCORPORATED, having a place of business at 1,461 First Avenue, 360 New York, New York State, United States of America

DEFENDER

 

Act: Cargill, Mellicks

Alt: Wilson Adv, Foster, Hughes Dowdall, Glasgow

 

At Edinburgh, 31st August 2015, the sheriff having resumed consideration of the cause sustains the first and second pleas in law for the Pursuers; repels the pleas-in-law for the Defender; Thereafter in terms of the craves; (ONE) Finds and Declares that the Pursuer has right to enter into possession of the said heritable subjects known as 6B Gloucester Square, Edinburgh and to exercise in relation to said subjects all other powers competent to a creditor in lawful possession of the security subjects by virtue of Section 24(1B) of the Conveyancing and Feudal Reform (Scotland) Act 1970, (as amended by the Home Owner and Debtor Protection (Scotland) Act 2010);  (TWO) Grants warrant to the Pursuer to enter into possession of the subjects known as 6B Gloucester Square, Edinburgh being the subjects described in the Standard Security for all sums due and to become due by the Defender in favour of the Pursuer registered in the Land Register of Scotland under Title Number MID138970 on 5th April 2013 and to receive and recover the rents of and from said subjects and to exercise in relation to said subjects all other powers competent to a creditor in lawful possession of security subjects by virtue of the said Conveyancing and Feudal Reform (Scotland) Act 1970, as amended;  (THREE) Ordains the Defender to vacate said subjects and to flit and remove themselves, their servants, employees, tenants, subtenants and others with their goods, furniture, gear and whole belongings furth and from the same and to leave the same void and redd, to the end that the Pursuer and others in their name may enter thereto and peaceably possess and enjoy the same;  (Four) Finds the defender liable to the pursuer in expenses as taxed, allows an account thereof to be given in, and when lodged, remits same to the auditor of court to tax and report and Decerns.

 

Finds in Fact:

  1. The pursuer is Westfoot Investments Limited, a company, which has its registered office at Unit Six, Acorn Business Park, Woodseats Close, Sheffield, England, S8 0TB. The pursuer offers short term bridging finance, secured over heritage, to borrowers in the financial market, in the UK.
  2. The defender is European Property Holdings, a company incorporated in the Republic of Panama, having its principal place of business at 1461 First Avenue, 360 New York City, New York State, USA. The defender is a property development company.
  3. The defender is the owner of residential properties at 6B Gloucester Square, Edinburgh and 14/2 Gloucester Place Edinburgh, EH3 6EF, which are the subject of this dispute. The court is accordingly seized of jurisdiction.
  4. On 13th March 2013 the defender entered into a fixed term loan agreement with the pursuer. The defender borrowed £285,000 from the pursuer for 6 months at 1.5% per month interest. In security of the obligation to repay the loan, the defender granted two standard securities, in favour of the pursuer. (1) A standard security over 6B Gloucester Square, Edinburgh. This was registered in the Land Register of Scotland under Title Number MID138970, on 5th April 2013. (2) A standard security over 14/2 Gloucester Place being the subjects described in a Standard Security granted by the defender in favour of the pursuer recorded in the General Register of Sasines, for the County of Midlothian, on 5th April 2013.
  5.  In terms of the agreement, in the event the defender defaulted and failed to pay any sum on a due date, interest was to run at the default rate of 2.5% per month, compounded, on sums unpaid.
  6. The defender took legal advice before entering the contract. No objection was stated by the defender to the interest rates or any other entry or exit trading term of the pursuer. The pursuer’s trading terms are competitive and conform to financial sector standards. The defender did not seek to negotiate any other more favourable terms. The defender was free to seek more favourable terms on the market but chose not to.
  7. In terms of the agreement, the £285,000 advanced to the defender was paid, net of 6 months interest payments. Accordingly, all instalments due for the 6 months loan were pre-paid. The term of the loan expired on 2nd October 2013. The balance due by the defender became payable on that date. The defender did not pay the balance on that date. The defender has made no repayments to the pursuer since the loan was advanced. As at the first day of Proof on 20th May 2015, the approximate outstanding balance due by the defender to the pursuer, in terms of the agreement (exclusive of litigation costs) was £486,825.82.
  8. After 12th September 2013, the defender contacted the pursuer and intimated inability to re-pay the principal sum due. The defender requested more time and offered to pay further instalments due at the default interest rate, on a short extension of the loan. The pursuer agreed. By January 2014 nothing had been repaid.
  9. On 21st January 2014, Tony Kirkham, an employee of the pursuer, served a default notice on the defender at 21a Rutland Square Edinburgh EH1 2AD, a known business address of the defender, for the outstanding sum due, which was by then £327,258.84.  The notice threatened court action for possession and sale of the 2 properties unless payment in full of all sums due was made by 4th February 2014.  By 4th February 2014 nothing had been repaid.
  10. On 14th February 2014, in terms of s19 (1) of the 1970 Act, the pursuer’s agents served calling-up notices of the standard securities on the defender, using Form A of Schedule 6 of the Conveyancing and Feudal Reform (Scotland) Act 1970, by recorded delivery post, in respect of both properties, at the defender’s principal place of business, 1461 First Avenue, 360 New York, New York State, USA. The debt due was, by this time, £343,410.68. Postal service failed, the notices were returned. This constitutes a formal requisition.
  11. On 14th February 2014, in terms of s19A of the 1970 Act, the pursuer’s agents gave notice to the occupiers of both security subjects, using Form BB of Schedule 6 of the 1970 Act, by recorded delivery post, alerting them to the calling up procedure and advising them to seek appropriate legal advice. Included in the notices were copies of the calling-up notices to the defender. No response to these notices was ever received by the pursuer.
  12. On 14th February 2014, in terms of s19B of the 1970 Act, the pursuer’s agents sent a notice in terms of s11 the Homelessness etc (Scotland) Act 2003 to the City of Edinburgh Council alerting it to possible proceedings to eject the defender company, arising from the Calling-up procedure.
  13. On 28th March 2014, in terms of s19(6) of the 1970 Act the pursuer’s agents sent, to the  Extractor of the Court of Session, a packet containing the failed service copy of the calling-up notice, for Walls of Court service, which had been returned to the pursuer’s agents, marked “Not Deliverable as Addressed – Unable to Forward”.
  14. On 29th May 2014, 60 days after service effected in the hands of the Extractor of the Court of Session, the Defender, having failed to comply with the terms of the calling-up notice, was in default. This too constitutes a formal requisition.
  15. On 5th June  2014 the pursuer’s agents wrote to the defender, by recorded delivery post, at its New York office enclosing a copy of the returned calling-up notice bearing the Extractor’s acknowledgment, intimating that the calling up period expired on 29th May 2014 and reminding the defender it was in continuing default. Information about the interest and charges due, to date, were specified in the letter. A copy of the agreement was enclosed. The pursuer in the letter indicates a continuing willingness to find a financial accommodation with the defender, even at that late stage and gave details of organisations the defender could approach for debt advice including Citizens Advice Scotland, the City of Edinburgh Council, the Law Society of Scotland and the Scottish Government website. No reply was received and no request for more information or assistance from the pursuer was ever made by the defender. This also constitutes a formal requisition.
  16. On 2nd July 2014 the pursuer’s agents signed form 11C in terms of Rule 3.4.3(2) of the Summary Applications, Statutory Applications and Appeals etc. Rules 1999, certifying that the necessary pre-action requirements had been complied with. The pursuer has provided the defender with clear information about the terms of the standard security, the arrears due and all charges applicable. The pursuer has made all reasonable efforts in the circumstances of the case to agree proposals with the defender in respect of repayment and provided information with regard to sources of advice and debt information and encouraged the defender to contact the local authority. The defender has failed to engage with the pursuer.  The defender company has taken no practical steps likely to result in payment to the pursuer of the whole amount and arrears due in terms of the agreement. The pre-action requirements specified in s24(1B)(2) to (6) of the Conveyancing and Feudal Reform (Scotland) Act 1970 and s5B(2) to (6) of the Heritable Securities (Scotland) Act 1894 have been complied with.
  17. On 2nd July 2014, in terms of s5A(2)(c) of the Heritable Securities (Scotland) Act 1894   a notice conform to s11 of the Homelessness  etc (Scotland) Act 2003 was given to Edinburgh Council alerting the Council to proceedings raised to eject the defender from the properties.
  18. On 4th July 2014 the present summary applications with Form 11C were lodged with the court. Warrant to cite the Defender at its place of business, in New York was granted on a 42 day induciae.
  19. On 9th July 2014 the Defender was cited by recorded delivery post. Notice of citation was also given to the occupiers of the security subjects, by recorded delivery post. The certificate of execution of citation shows that Form E was included in both citations.  No response was ever received by the pursuer’s agents from any occupiers of the security subjects and no applications for statutory relief have been made, within the process, by any entitled residents.
  20. The defender has failed to explain why the loan has not been repaid. The pursuer has fulfilled all its obligations to assist the defender. No entitled residents have entered process or made themselves known to the pursuer. The pursuer has not unnecessarily prolonged these proceedings.

 

Finds in Fact and Law:

  1. The defender having failed to repay the sums due in terms of the loan is in default in terms of s20(1) of the Conveyancing and Feudal Reform (Scotland) Act 1970, as amended, and the pursuer is entitled to declarator in terms of the first crave of the writ, with expenses.
  2. The defender being in default within the meaning of s20 and standard condition 9(1)(a) of Schedule 3 of the Conveyancing and Feudal Reform (Scotland) Act 1970 as amended, and the pursuer, having served all necessary notices and complied with the pre-action requirements specified in s24A of the Act; and it being reasonable in the circumstances so to proceed; is entitled, in terms of s24(5), the court first having had regard to the matters set out in s24(7) of the Act; to decree in terms of the second and third craves of the writ, with expenses.

 

Note

 

The Issue

 

[1] The pursuer in this case is a company which specialises in providing short term secured bridging loans on the financial markets. The company is based in England but trades throughout the UK. The defender is a Panamanian registered company with a principal place of business in New York City, USA. No officer of the defender company gave evidence before me but from the name of the company and the activity manifest by this case, it is a property development company. It owns two properties, in Edinburgh, relevant to this case. In March 2013, the defender negotiated a short term loan with the pursuer, for an agreed period of six months. The two Edinburgh properties were given in security of the defender’s obligation to repay the loan when due. The loan has never been repaid. The pursuer called-up the loan on 14th February 2014 and now seeks the authority of the court to enter into possession to sell the properties to realise cash to redeem the loan. A warrant for ejection is also sought. The case has a tortuous procedural history and is further complicated because the Pursuer’s agent has conceded that the properties are residential and not commercial, for the purposes of the calling-up procedure of the Conveyancing and Feudal Reform (Scotland) Act 1970 as amended and the ejection procedure of the Heritable Securities (Scotland) Act 1894 as amended. According to the pursuer’s agent and defender’s counsel that concession having been made, a complex suite of statutory notices and obligations is engaged. These demand of a creditor, seeking to enforce a heritable security over residential property, exact compliance with a wide range of protective measures all of which, in my opinion, are designed to prevent debtors and homeowners, in financial difficulty, from harshly and unreasonably being removed from their homes, in the midst of a domestic financial crisis, if that can be, at all, avoided. The protections are, variously, contained in the Homelessness etc (Scotland) Act 2003, the Home Owner and Debtor Protection (Scotland) Act 2010 and the Housing (Scotland) Act 2010 which introduce relevant amendments to the 1970 Act and 1894 Act. For my part, I have no doubt that these measures were never intended by the Scottish Parliament to shield Panamanian property companies from the ordinary consequences of their failure to comply with obligations in terms of contracts freely entered into, on the financial markets.

[2] However, the concession having been made and this being a summary application, I required to hear evidence to decide whether the pursuer had complied with the procedure and requirements contained within the statutory scheme in Part II of the Conveyancing and Feudal Reform (Scotland) Act 1970, as amended, for calling-up standard securities over residential property used to secure a debt and whether I can authorise the pursuer taking possession of the security subjects with a view to sale and separately, whether I can order summary ejection of the defender, from the property, in terms of the Heritable Securities (Scotland) Act 1894 as so amended, pending sale of the subjects.  

The Pleadings

[3] There are two identical actions, one for each property secured. Notwithstanding the fact that the case presents as a summary application, there is in relation to B987/14 a fifteen page amended record setting out the pleadings for each side, five craves for the pursuer and each party has four pleas-in-law. That and the lengthy procedural history of the case sits in stark contrast with the suggestion in the explanatory notes accompanying the Home Owner and Debtor Protection (Scotland) Act 2010 that a summary application is the preferred vehicle for an action such as the present because it is a speedy and efficient means of providing a remedy.

Pursuer’s case.

[4] Briefly stated, the amended closed record discloses that the pursuer seeks a declarator that it has a right to take possession of 6B Gloucester Square, Edinburgh; it seeks a warrant from the court entitling it to take possession of the subjects, an order ordaining the defender to remove and a warrant for ejection of the defender from the property. The pursuer avers that in security of its obligation to repay a loan, the defender granted a standard security over the subjects on 5th April 2013. The defender, it is said, has not repaid the loan and is in continuing default. The pursuer has called up the loan but no repayment has been made. The pursuer avers it is now entitled to exercise a right of possession with a power of sale in terms s20 of the Conveyancing and Feudal Reform (Scotland) Act 1970. Moreover the pursuer avers it is entitled in terms of s5(1) of the Heritable Securities (Scotland) Act 1894 to eject the defender from its occupation of the property.  The defender resists these claims, partly on the basis that the pursuer has failed to comply with the relevant statutory pre-action requirements and also because it would in the circumstances be unreasonable, having regard to the efforts made to refinance and restructure the debt by Tanya Murray, to grant decree in a case such as this.

[5] In answer to the defender’s case the pursuer avers that an initial notice of default was sent to the defender at 21a Rutland Square, Edinburgh, on 21st January 2014, which was a correspondence address held for the defender. However, notwithstanding the initial default notice, the pursuer relies on the defender’s failure to comply with the calling-up procedure commenced on 14th February 2014, as the basis for the application for the remedy of possession. The calling-up notice is also said to be a formal requisition for the purposes of s5 of the 1894 Act. The pursuer avers that by letter of 5th June 2014 it provided sufficient information to satisfy its obligations in terms of the pre-action requirement under the 1970 Act and the 1894 Act. The pursuer avers the calling up notice of 14th February to the defender’s New York office failed and edictal citation was effected on 28th March 2014. It is said the defender did not comply with the calling-up notice and has been in default since 29th May 2014. It is said the defender has repeatedly failed to pay the debt having been called upon so to do. The pursuer avers that in compliance with the relevant statutory provision, notice of the calling up process was given to the City of Edinburgh Council on 14th February 2014 and again on 2nd June 2014. The pursuer avers it has complied with all the pre-action requirements and relies on a certificate to that effect dated 2nd July 2014, Form 11C, lodged in process. The pursuer avers all the necessary requirements have been complied with. Clear information about the terms of the standard security, the arrears due and debt advice sources have all been provided. The defender has failed to respond to any approach. The pursuer avers that there was in 2014 an agreement in principle towards a settlement but the defender never at any time established it could repay the debt due. The pursuer avers the defender has failed to market the properties for sale to repay the debt. In June 2014 the pursuer avers that a number of proposals for settlement were discussed involving Maurice Almond, a broker, Tanya Murray, the wife of Michael Karus, a director of the defender company, David Kernahan and others with a view to resolving the situation. None of these discussions actually realised funds for settlement. The action is accordingly necessary.

Defender’s case.

[6] Briefly stated, the defence to this action includes an admission that the loan was made and the defender is in continuing arrears. The defender relies on the suite of protections created by the 2010 Act. The defender relies on the failure of the pursuer to comply with the strict terms of the necessary statutory requirements. In particular exception is taken to the default notice served by the defender on 21st January 2014. It is averred to be defective. It does not comply with the pre-action requirements and was not provided as soon as reasonably practicable following on default. Also the default notice was not sent to the registered office of the defender in Panama but to an address at 21 Rutland Square, Edinburgh. Exception is taken to the pursuer’s letter of 5th June to the defender which it is said is inadequate to comply with pre-action requirements.  It is also said Form E of schedule 6 of the 1970 Act was not served on the defender. According to the defender’s pleadings that is required by s24(3)(a) of the 1970 Act. Exception is also taken to the fact that Form 11C is defective.

[7] In addition the defender company avers the pursuer has failed to provide clear information about the terms of the standard security, arrears and charges due as obliged to in terms of the 2010 Act. The pursuer has also failed it is said to provide the defender with information regarding sources of debt and advice as it is bound so to do. The defender avers this action is unnecessary. The defender also avers the interest rate agreed is unfair. The interest charged is excessive and the pursuers have unnecessarily prolonged negotiations in this case to make more money from the loan. In these circumstances it is said to be unreasonable to grant decree. The defender avers that funds may soon become available to repay the loan. Reference is also made to substantial efforts made by Tanya Murray to resolve this issue but to no avail. Averments are made about negotiations in June 2014 involving Tanya Murray, Maurice Almond and other finance brokers to re-finance the loans and repay the pursuers. These negotiations failed. It is also averred that the terms of the loan agreement relating to default interest at 2.5% and penalties to be applied at the rate of 5% should not be given effect to and these parts of the loan agreement should be reduced ope exceptionis.

The Evidence

[8] I do not propose to rehearse the evidence in this case in any detail. I heard evidence on 20th May 2015 and 10th July 2015.

Pursuer’s Proof

[9] Gary Handley (52) gave evidence. He is a Chartered Accountant and director of the pursuer company. He and his business partner David Kernahan own the company. He spoke to the two loan agreements over the security subjects. Both his company and the defender were represented and advised by solicitors during negotiations leading up to the contract. The defenders used Hughes Dowdall in Glasgow. He spoke to P5/2/11 a facility letter dated 13th March 2013. The terms of contract were standard for the financial sector. He had no initial concerns about the loan. The loan expired on 2nd October 2013. He was contacted by the defender’s mortgage broker, Maurice Almond, who indicated the defenders could not re-pay the loan as agreed. He was asked if he would consider a short extension. He agreed to that. No money was ever repaid on the loan. There was a proposal from the Royal Bank of Scotland in May 2014 that funding might be available to re-finance the loan but this came to nothing. He was referred to Euan at RBS but that potential funding stream dried up. A default notice was served by the pursuers on 21st January 2014, P5/1/5(i). This was done in-house by Tony Kirkham.  It was sent to 21a Rutland Square Edinburgh a known address of the defender. There was another company in the background, Playfair Investments. Money had been loaned to it also. The lawyers became involved and the loan was called-up on 14th February 2014. He instructed Mellicks in Glasgow. There were a number of attempts to re-finance and restructure involving companies such as Soho Finance. Tanya Murray tried to get refinancing, unsuccessfully. At one point Tanya Murray was going to buy the defender property and take on the loan debt. That fell through. There was a third attempt in September 2014 to rescue the situation through Mike Marsden a broker in Bolton but that never materialised. There was a negotiation about a settlement figure. The defenders, by that time, owed approximately £428,000 on the deal. Marsden offered £375,000 but gave no proof he had the money. The case was in court by this time. There has never been any hard offer of money to repay the debt. The witness was cross examined. It was put to the witness there had been a number of attempts to obtain funding to re-pay the debt from, RBS, Soho Finance, Atlanta Finance and Edinburgh Asset Finance. This was not disputed.

[10] David Kernahan (45) gave evidence. He is a director of the pursuer company.  He spoke to the loan agreement. With Gary Handley he is responsible for the day-to-day running of the business. He said the pursuers were approached by a broker, Maurice Almond and asked to lend to the defender in exchange for securities on two Edinburgh properties. The loan-to-property-value ratio, the pursuers operate is a maximum lend of 60% of the property secured value. The loan given here was well secured on the properties. The pursuer has the first charge over the secured properties. The loan has never been repaid. Tanya Murray is the wife of Michael Karus who is a director and attorney of the defender company. She approached the witness at the end of May 2014 to try to resolve the situation. Between May and June 2014 the witness spoke to Tanya Murray, 4 or 5 times to try to resolve. Tanya Murray wanted all the loans of Playfair Investments, a separate company, now in administration and the defender company resolved at the same time. She said she had an offer of £900,000 from RBS to resolve everything as a global deal. No proof of funds was ever forthcoming.  The witness was cross examined. Various e mails were put to this witness showing that there had been a great deal of discussion about possible ways of paying the loan off. The witness was questioned about the rates of interest charged by the pursuer company.

Defender’s Proof

[11] Tanya Murray (35) gave evidence. She is a trainee solicitor with Hughes Dowdall. She is married to Michael Karus who is a director of the defender company. She has no official connection with the defender company. Her husband is also its attorney. The company buys and sells property. The witness tried to re-negotiate the loan from the pursuers. She had discussions with David Kernahan and David Kirkham, an employee of the pursuer. She put a deal to David Kernahan that she would borrow £300,000 to refinance the loan to the defender. There was a problem, Maurice Almond, a broker, had a second charge over one of the properties.  There was a suggested restructure and re-ranking of securities. Maurice Almond objected and this deal fell through. The witness spoke to offers of loans she had from Soho Finance and Livia Finance, which were available to clear the debt. She asked for more time to negotiate in June 2014.  Playfair Investments, a connected company, was put into administration on 12th June 2014. The witness was cross examined. She has no connection to the defender company. She was not involved in the original loan from pursuers. Asked and could not explain why Michael Karus is not giving evidence in this case. Did not know why the short term bridging loan was not repaid. It was not her loan. Did not recognise the signature on the facility letter which was that of Michael Karus. She was happy to take on the debt for this investment. She cannot say what the role of Maurice Almond was in the original loan negotiation. She had funding to pay both loans to the defender and Playfair Investments. She has no power to put the properties on the market to sell them to repay the loan. The properties are tenanted.

Submissions

Pursuer

[12] Miss Cargill for the pursuer invited me to grant decree as craved. Her position was that I should accept the evidence of the two witnesses for the pursuer as credible and reliable. Central to her written submission was the proposition that this is a case of calling-up of a standard security on the basis that the debtor was in breach of contract. As such, the pursuer has served all the necessary notices and complied with the pre-action requirements regarding information and advice. She submitted that there was no reason why decree would be unreasonable in the circumstances. The defenders have paid nothing in terms of the loan and are in default. The defender has not demonstrated it is in a position to pay the loan. The fact that the pursuer company served a default notice on the defender on 21st January 2014 does not prevent the pursuer using the calling up procedure to secure the remedy of possession with a right to sell the security subjects, by applying to the court, which is what has happened here.

Defender

[13] Counsel’s written submissions invited me to dismiss this action for 4 reasons:

 

  1. Pursuer non-compliance with the pre-action requirements of section 24A of the Conveyancing and Feudal Reform (Scotland) Act 1970;
  2. The competency of the crave for ejection under the Heritable Securities(Scotland) Act 1894;
  3. The reasonableness of granting decree given the history of the efforts made to effect repayment; and
  4. The punitive interest rate applicable in the event of default.

 

Discussion and Decision

[14] In my opinion there are two aspects to this action. The first is the calling-up procedure in terms of s20 of the Conveyancing and Feudal Reform (Scotland) Act 1970 as amended. The second is the ejection process which is regulated by s5 of the Heritable Securities (Scotland) Act 1894 as amended.

The Calling-up procedure

[15] I require to set out in some detail what I am satisfied actually happened in this case. This is tedious but necessary. This narrative is reflected in the findings in fact.

[16] The defender agreed to repay the loan in 6 months. Standard securities were granted over both properties to secure that obligation.  The defender breached the obligation and remains in continuing breach. Notwithstanding service of an ‘in-house’ default notice on 21st January 2014, the pursuer, quite separately, was entitled to and did instruct lawyers to call-up the standard securities on 14th February 2014. That was done in conformity with s19 of the 1970 Act. In my opinion, the defender had 60 days to pay the outstanding debt from the date of effective service, failing which the defender was in default. Service of the calling-up notice, was made to the principal place of business of the defender, stated on the face of the loan agreement to be 1461 First Avenue, 360 New York, New York State, USA. This service failed. The pursuer, as it was entitled to do in terms of s19(6) of the 1970 Act, then served the calling-up notices in the hands of the Extractor of the Court of Session, which is good service. That was done on 28th March 2014. The 60 day period the defender had to pay the debt plus interest, accordingly, ran from that date. As the debt was not repaid by 29th May 2014, the defender was, in my opinion, in default from that date.

Debtor Default

[17] Because the pursuer concedes that the securities are over residential property, it is said a heritable creditor in that situation must obtain the authority of the court before any of the rights stated in s20(2A)(b) can be exercised, if the debtor is in default. That includes the right to sell the subjects in s20(2) and standard condition 10(2) and the right to enter into possession in standard condition 10(3). Further, it is said, when the debtor defaults, in respect of a loan secured over residential property, the legal process is subject to a protective regime introduced by the Home Owner and Debtor Protection (Scotland) Act 2010. That regime introduced a mandatory suite of pre-action requirements, contained in s24A of the 1970 Act, which a creditor is bound to observe before commencing an action for possession. It is this regime which counsel for the defender argues, the pursuer has not complied with and which constitutes a central part of the defence in this case. S20(2A) of the 2010 Act states:

‘Where the standard security is over land or a real right in land used to any extent for    residential purposes, the creditor is entitled to exercise the rights specified in standard condition 10(2) and (3) (and mentioned in subsections (1) and (2) above) only—

(a) where the conditions in section 23A of this Act are satisfied, or

(b) with the warrant of the court, granted on an application under section 24 of this Act.’

I require to say something more about the legislation. The application to court is regulated by s24 of the 1970 Act which provides that the action must be in the form of a summary application, regardless of whether it includes a crave for any other remedy, s24(1D). The present case contains a separate crave for ejection and is thereby what is called a combined application, (Rule 3.4.1(c) Summary Applications Rules 1999). When such an application is made certain necessary statutory notices specified in s24(3)(a) to (c) of the 1970 Act require to be given to the debtor, the occupier of the secured premises and the relevant local authority. As indicated by the findings in fact, I am satisfied the notices were given. Very importantly however, the court is inhibited in one particular regard. It has no power in terms of the regime relating to residential property, to grant an order for possession with a right of sale, unless it is satisfied that the creditor has complied with the pre-action requirements listed in s24A and that it is separately reasonable in the circumstances to grant the application, s24(5)(b). In my opinion, this judicial oversight and discretion to refuse decree constitutes a major debtor protection introduced by the legislation. Further, where the debtor appears and is represented, in deciding whether to grant an application the court is obliged to have regard in particular to certain specific matters listed in s24(7) of the Act. Subject to the court’s residual discretion and creditor compliance with the pre-action requirements, these matters frame the context within which the decision to grant or not is made.

These are:

‘(7) ….—

(a) the nature of and reasons for the default;

(b) the ability of the debtor to fulfil within a reasonable time the obligations under the standard security in respect of which the debtor is in default;

(c) any action taken by the creditor to assist the debtor to fulfil those obligations;

(d) where appropriate, participation by the debtor in a debt payment programme approved under Part 1 of the Debt Arrangement and Attachment (Scotland) Act 2002; and

(e) the ability of the debtor and any other person residing at the security subjects to secure

reasonable alternative accommodation.’

 

[18] The subsection on my reading assumes the represented debtor may furnish the court with an explanation for the default and offer some proposals for repayment. Section 24(7)(e) appears, to me, to be directed at natural persons actually living in the security subjects who are at risk of losing their home, if the order is granted. Thus, in a case where the debtor appears or is represented, not only is the court very specifically directed by s24 as to how it must act, and what factors to have particular regard to, the creditor must fail in an application unless he can demonstrate he has complied with the pre-action requirements. These requirements have been introduced, in my opinion, to impose a legal obligation on creditors to provide practical help to debtors in financial crises and further to restrain creditors from taking precipitate legal action to enter into possession of security subjects with a view to ejection of the debtor and possible sale or management of the property. The regulations introduced are, complex and demanding of a heritable creditor.

[19] As it is suggested they have not been complied with in this case, I require to identify what the pre-action requirements are and where they can be found. The pre-action requirements are found in two places. S24A(2) to (6) sets out a prescriptive list of actions that a creditor must take before raising an action, s24(1C), after a debtor falls into default, s24(1B). Read shortly, the creditor is required at an early stage to provide the debtor with clear information and advice about the standard security used to secure the obligation to repay the debt; information about the arrears, interest and charges due in terms of the debt and provide information about sources of advice and assistance the debtor can contact for help in relation to debt management. The creditor is obliged to encourage the debtor to contact the local authority in the area the subjects are situated. The creditor must even notify the local authority of any action for possession or ejection commenced. The creditor must engage positively with the debtor and make reasonable and constructive efforts to agree realistic debtor proposals to restructure and reschedule the debt secured.

[20] In addition, the Scottish Ministers are empowered to make further provisions about pre-action requirements and heritable creditors are required to have regard to any guidance issued on these matters s24A(7) and (8).  The Ministers have in fact made further provision and I was referred to it by counsel in relation to the obligation on a heritable creditor to satisfy the pre-action requirements  ‘as soon as reasonably practicable’ after the debtor has entered into default. The Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010, SSI 2010 No. 317 (the PARs regulations)  provides detailed  guidance about how creditors may further assist debtors who are subject to the protective regime, introduced by the Home Owner and Debtor Protection (Scotland) Act 2010.  Read shortly, the supplementary PARs regulations, amplify the nature of the information the creditor requires to provide the debtor in terms of the principal obligation to inform contained in s24A(2) of the 1970 Act. The creditor is obliged to provide the necessary information as soon as reasonably practicable, after the debtor enters into default. In addition, the extent to which and the manner in which the creditor is obliged to engage constructively with the debtor is further codified in s3 and s4 of the PARs regulations. Finally the regulations name specific organisations that the creditor can direct the debtor to for debt management advice and assistance.  

[21] The PARs regulations, especially s3(1)(e) seem, to me, to relate, not to corporate financial circumstances or debt but the ‘personal and financial circumstances’ of the debtor. The regulation does not appear to be designed to fit corporate financial default. Thus, in elaborating upon the duty on a creditor to make reasonable efforts to agree alternative proposals to repay the debt the regulations state:

‘3.— Requirement to make reasonable efforts to agree proposals

(1) In complying with the pre-action requirement contained in section 5B(3) of the 1894 Act and section 24A(3) of the 1970 Act the creditor must—

(a) make reasonable attempts to contact the debtor to discuss the default;

(b) provide the debtor with details of any proposal made by the creditor, set out in such a way as to allow the debtor to consider the proposal;

(c) allow the debtor reasonable time to consider any proposal made by the creditor;

(d) notify the debtor within a reasonable time of any decision taken by the creditor to accept or reject a proposal made by the debtor; and

(e) consider the affordability of any proposal for the debtor taking into account, where

known to the creditor, the debtor's personal and financial circumstances.’

 

[22] However, the protective regime does not stop there. The pre-action requirements extend protection to a class of persons who derive their protection either from ownership of the property used to secure the debt or from a relationship to the debtor or proprietor of the subjects secured. Derivative protection is regulated by s24B of the 1970 Act. A special class of entitled residents is created. It is not necessary to elaborate upon this but merely to observe that these comprise a wide range of persons, whose sole or main residence (home) is the security subjects (including the owner if he is not the debtor, a non-entitled spouse, a non-entitled civil partner, a partner and a civil partner). These all seem to be persons who are in a close personal relationship with the debtor or proprietor and who by virtue of that immediate relationship are also protected in their occupation of the security subjects, as their home, in the face of a court action to possess the property or forcibly eject them in their occupation of the subjects. Should any of that class of persons enter the legal process, they too come under the supervisory jurisdiction of the court and their interest requires to be considered, by the court, as well, when it has particular regard to the matters set out in s24(7), before an application can be granted.  I pause only to observe that, in my opinion, the language used by the extended protective scheme and the relationships mentioned tend to suggest that protection applies to natural and not legal (juridical) persons such as property companies.

Has the creditor complied with the pre-action requirements?

[23] The first part of the defence in this case is that the pursuer has failed to comply with various aspects of the pre-action requirements introduced by the Homeowner and Debtor Protection (Scotland) Act 2010, and accordingly, the application should be refused. That defence proceeds upon a concession made by the pursuer’s agent, that, as the security subjects are residential properties and given the natural meaning of the words used in s20(2A) of the 1970 Act, the protective regime is engaged. I disagree. The matter, in my opinion, is not so simple. S20(2A) provides:

‘(2A) Where the standard security is over land or a real right in land used to any extent for residential purposes, the creditor is entitled to exercise the rights specified in standard condition 10(2) and (3) (and mentioned in subsections (1) and (2) above) only—

(a) where the conditions in section 23A of this Act are satisfied, or

(b) with the warrant of the court, granted on an application under section 24 of this Act.’

I reject the pursuer’s literal reading of this subsection.  Miss Cargill, supported by counsel in this regard, seemed resigned to the suggestion that land use alone determined whether the protective regime is engaged and applies, irrespective of the purpose for which the standard security was used and the scheme and purpose of the 2010 Act.

[24] I am not persuaded this restricted reading is justified or produces a legitimate result. In fact, I am of the opinion, it produces a perverse result and is the antithesis of the intention of the legislature. In my opinion, where a standard security is used to secure a debt over land used to any extent for residential purposes then the protective regime is engaged, the creditor is restrained and the debtor and certain other residents are entitled to protection.  However, property used for residential purposes, is property used as a home. But whose home? On Miss Cargill and counsel’s reading of the Act anyone’s home will do. As I read the 1970 Act, as amended, it must be a home used either by the grantor of the standard security or the maker of the obligation secured. There will, potentially, be three types of person, the proprietor or the debtor, if these are different persons, though they will typically be the same person. Also an occupier using the property as a home, typically a tenant, is protected.

Thus, if sections 24 to 24C of the 1970 Act, as amended, are read together with s20(2A) it is obvious that the protection introduced by the Home Owner and Debtor Protection (Scotland) Act 2010, as the title to that Act suggests, is restricted solely to:

  1. Homeowners, who are debtors, who use their home, or any part of it, as security for a debt, s24(1)B and s24(3)(a).
  2. Homeowners, who are not debtors but who allow their home, or any part of it, to be used by a debtor, as security for a debt. These homeowners are entitled residents in their own right, s24(3)(a) and s24C(1)(a).
  3. Occupiers who may be rendered homeless by an application being granted and who are not otherwise protected under the Housing (Scotland) Act 1988, s24(3)(b).
  4. All other entitled residents who have no proprietary interest in the subjects but who live there for the most part using the property as their home and derive protection from their close personal relationship to a proprietor or debtor, s 24B(2) and s24C(1)(b)-(f).

Section 24(10) makes it clear, for the avoidance of doubt, that tenants who are occupiers under an assured tenancy, within the meaning of the Housing (Scotland) Act 1988, are separately protected.

[25] In my view, this reading of the Act which focuses on the ‘home’ use of the property is especially compelling when one has regard to s24(7)(e) of the 1970 Act, which in my judgement only makes sense if referred to natural not legal persons, who are also debtors. A legal entity such as the defender does not have a home, in the sense it would require to find alternative accommodation, in the event of an action for possession and ejection being granted over property it owns.

[26] Separately, the creation of a class of entitled residents who derive protection from close personal relationship, of the kinds described, with the debtor or proprietor indicates to me that the legislative intent, in introducing this protection, was more restricted and targeted than the general and wide conclusion urged on me by parties, applying a mechanical and literal reading to s20(2A) of the 1970 Act, that debtor protection is always engaged if a security is granted over residential property, irrespective of the purpose of the standard security, namely, to secure an obligation to repay a debt, over the grantor or owner’s home. Further, the PAR regulations, especially PAR 3(1)(e), are in their tenor, language and scope targeted at natural persons in financial trouble rather than illiquid or insolvent corporate borrowers. In my opinion, the protective regime does not engage in respect of every standard security over residential property, as the pursuer’s agent and counsel submitted to me, in argument.  Residential use of the security subjects, to some extent, is a necessary but, in my opinion, an insufficient precondition, alone, for 2010 Act protection, to apply. For protection to engage, the property secured must also be used as a home, by the three types of person or occupants mentioned above to qualify the proprietor, the debtor and other users, to statutory protection. In my opinion, home ownership and home use, not land ownership and land use, is the trigger for the operation of the protective scheme. Core to the suite of reforms is the protection of the debtor or entitled proprietor’s home which may be imperilled, to the prejudice of a range of other entitled persons living there as their home, by a precipitate action for possession and ejection. In my opinion, the sole beneficiaries of the legislation are debtors who own their home and use it as a security for debt, home owners who allow the home they mostly live in to be used as security for someone else’s debt, occupiers whose home is not otherwise protected by legislation and entitled residents who live solely or mainly in a home used by a debtor or proprietor to secure a debt. This latter group includes former estranged partners of debtors and or proprietors who have used the security subjects as a home, for at least 6 months, before separation, who have children from their relationship with the debtor or proprietor, under the age of 16, also living with them in the security subjects as their home. However, corporate borrowers that grant standard securities over their residential property assets and use these as collateral security, to raise capital on the financial markets, are not included within the scope of the protection created. That kind of borrowing is a commercial activity. In my opinion, the defence as pled is irrelevant. I would dismiss this aspect of the defence and grant decree de plano, in respect of craves one, two and three, for that reason alone.

[27] Further, the SPICe Briefing on the Home Owner and Debtor Protection (Scotland) Bill, (09/73) dated 22 October 2009 states, ‘The Bill contains measures to protect people struggling to deal with debt by increasing protection for those who are facing repossession of their homes or bankruptcy.’ Also the guidance issued by the Scottish Government on pre-action requirements for creditors issued in 2009 states, “In early 2009, in response to the economic downturn and consequent rise in repossessions, the Scottish Government convened [a] Repossessions Group, as a sub-group of the Debt Action Forum, to consider whether protection for Scottish home owners facing repossession was sufficient.” It appears the protection was intended for home owners not corporate property speculators.

[28] Accordingly, I am of the opinion this case is one I require to treat in the way described in Halifax Building Society v Gupta 1994 SLT 339 ; see also The Enforcement of Heritable Securities, Mark Higgins 2nd Ed, pg98 at 7.11. That being so I do not consider the court has a discretion in a case, such as the present, where the heritable creditor asserts its right to enforce a security in the face of an admitted debt which is in continuing arrears and the protective regime is not engaged.

[29] If I am wrong in relation to the law I am satisfied that the pursuer has complied with the pre-action requirements, as is clear from my findings in fact and having had regard in particular to the matters mentioned in s24(7) of the 1970 Act, especially the failure of the defender to explain the reasons for the default under s24(7)(a) and the absence, in my opinion (see below at para [35]), of any realistic or reasonable proposals to remedy the situation,  I would grant decree as craved on the basis of those findings. Additionally, I had particular regard to s24(7)(c) and the efforts the pursuer has made to assist the defender in supplying advice and information. Further I did not consider the matter referred to in s24(7)(d) was relevant, nor was it suggested it was. Finally for reasons specified in para [30] below I did not consider s24(7)(e) applied as the defender is a corporate entity.  

The crave for ejection under the Heritable Securities (Scotland) Act 1894

[30] Ironically, the defender changes tack in this aspect of the defence against the application and positively asserts its corporate identity, as protection from ejection. The argument is based on strict statutory interpretation. It is said by counsel, an action for ejection, is competent only against a natural person in occupation. The defender is a legal person. Accordingly the crave is incompetent and cannot be granted. I disagree. The relevant law is contained in s5(1) of the 1894 Act, as amended, which provides:

“Where a creditor desires to enter into possession of the lands disponed in security, and the proprietor thereof is in personal occupation of the same, or any part thereof, such proprietor shall be deemed to be an occupant without a title, and the creditor may take proceedings to eject him in all respects in the same way as if he were such occupant:

Provided that this section shall not apply in any case unless such proprietor has made default in the punctual payment of the interest due under the security, or in due payment of the principal after formal requisition.”

The 1894 Act, as amended, extends to proprietors in personal occupation of their home, the same suite of protections given by the 1970 Act, as amended, to debtors and others, if they are faced with an application to eject them from their home, following default or calling-up of their standard security. For the reasons given above I am of the opinion that the defender does not qualify for statutory protection from ejection in terms of the protective regime introduced by the 2010 Act. However, counsel did not seek to persuade me it did but rather that a more fundamental objection applied. Counsel’s argument was that the defender, as a legal (juridical) person and not a natural person, cannot be in personal occupation of the subjects and accordingly cannot be ejected from them. If this is true another formidable reason exists why the protective regime introduced by the 2010 Act, amending the 1970 Act, is not engaged. Implicit in this reasoning is the fact that the defender, as an incorporeal legal person, cannot have or use a home in the ordinary way as a home owning debtor and for that reason, as well, is also beyond the scope of the protective regime introduced by the 1970 Act, as amended.

[31] However, the present argument in the defence centres on the phrase ‘and the proprietor thereof is in personal occupation’ as that phrase is used in the 1894 Act. The meaning of s5 was considered in Royal Bank of Scotland plc v John Wilson and another [2010] UKSC 50. For present purposes it only requires to be said that it was decided by the court and conceded by counsel in that case, that a calling-up notice constitutes formal requisition for the purposes of the application of s5 of the 1894 Act. In the present case I have held the calling-up of 14th February 2014 is a formal requisition. Accordingly the section is engaged.

[32] It seems to me the way in which this subsection is read and given effect to is central. Counsel gives the words in the statute their ordinary meaning and argues application to the defender is beyond their scope. Yet it is not disputed the pursuer loaned the money, that it has not been repaid and that the standard security was given in security of the obligation to repay. The only bar to the remedy of ejection which the pursuer seeks, which would strengthen its right of possession and enable it to sell the subjects more effectively, to recoup its money, is a particular reading of the words in the statute. A plain reading discriminates between natural persons in actual occupation and legal (juridical) persons in civil occupation.

[33] So far as it is possible to do, I require to read and give effect to primary legislation in a way that is ECHR compliant in accordance with the obligation contained in s 3 of the Human Rights Act 1998. It is also unlawful for the court to act in a way which is incompatible with a convention right, in terms of s6 of the Human Rights Act 1998.  Is a convention right engaged in this case? I would answer that question in the affirmative (AXA General Insurance Company Ltd v Lord Advocate 2012 S.C. (U.K.S.C.) 122) because Art 1 of Protocol 1 to the Convention provides:

‘Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.’

Admittedly, this is a private law and not a public law case. However, It seems to me the pursuer is being deprived of its money, unlawfully. Whether it is a private law or public law case I am required to read and give effect to legislation, so far as it is possible to do, in a way that is ECHR compliant. Can the legislation be read in a way that is ECHR compliant? Guidance is provided by Ghaidan v Godin-Mendoza [2004] H.R.L.R. 31.

‘124 Sometimes it may be possible to isolate a particular phrase which causes the difficulty and to read in words that modify it so as to remove the incompatibility. Or else the court may read in words that qualify the provision as a whole. At other times the appropriate solution may be to read down the provision so that it falls to be given effect in a way that is compatible with the Convention rights in question. In other cases the easiest solution may be to put the offending part of the provision into different words which convey the meaning that will be compatible with those rights.’

In my opinion s5(1) is a deeming provision which classifies the nature of the holding a proprietor is deemed to have for the purposes of ejection. If the proprietor in personal occupation is in default, he is deemed to be an occupier without title and thus vulnerable to summary ejection. In my opinion, no unforeseen consequence will flow from allowing legal (juridical) persons access to identical remedies enjoyed by natural persons, in this regard. Accordingly I would read the phrase ‘in personal occupation’ down to, ‘in occupation’ which has the effect of including both personal and civil occupation, which is ECHR compliant, without altering the intention of the legislation, to provide a summary method of removal of an occupier in default of a heritable, now standard, security. On that basis, I would hold the remedy could competently be granted against a legal (juridical) person.

[34] However, it is not suggested in this case, that the subjects are actually being used by the defender. It seems to me in a practical sense there is nothing for sheriff officers to eject, as it is neither averred nor proved, that the subjects are actually occupied by the defender. It was accepted by the pursuer that the premises are tenanted. Section 5A(9) of the 1894 Act mirrors Section 24(10) of the 1970 Act and makes it clear, for the avoidance of doubt, that tenants who are occupiers under an assured tenancy, within the meaning of the Housing (Scotland) Act 1988, are separately protected from ejection thus a warrant annexed to these proceedings could not avail against such a tenant. Therefore, I am not persuaded the crave, which is an extreme form of removal that would require justification, is necessary or justified on the evidence led. Accordingly I shall refuse that crave.

The reasonableness of granting decree given the history of the efforts made to effect repayment

[35] This ground of resistance is based on the judicial discretion in s24(5)(b) of the 1970 Act as amended. This subsection gives the sheriff a residual judicial discretion to refuse the application, unless satisfied in the circumstances of the case that it is reasonable to grant it. Given that I consider no statutory protection applies in this case, this ground is also irrelevant.

[36] However, if I am wrong in law in that regard, I am satisfied that it is reasonable in the circumstances of the case to grant the pursuer its remedy. The loan was for a fixed term. No repayment has been made. No explanation has been given for the failure to repay. No officer of the defender company gave evidence to explain what happened or what steps had been taken to remedy the situation. Instead counsel for the defender called Tanya Murray, the wife of Michael Karus, a director who is the attorney of the company. I was not persuaded by Tanya Murray’s evidence. I was not satisfied she had any authority to speak for the defender. I am very sceptical that an officer of the defender company has not given evidence. I consider the defence as pled to be wholly specious and fallacious. It seems to me the easiest way to answer a calling-up notice is to repay the debt, not talk about it. Even taking Tanya Murray’s evidence at its highest, that she had access to real funds to repay and restructure the secured debt, the fact is she did not do this. I was not persuaded by the suggestion that the pursuers were unreasonably delaying repayment to extract more interest from the loan. I found that suggestion fanciful. I was impressed by the pursuer’s witnesses, both of whom seemed to me to be honest and reasonable professional business men. All of the promises made by Tanya Murray came to nothing. The pursuer, in good faith, complied unnecessarily, in my opinion, with the terms of the 1970 Act as amended and assisted the defender as best it could but to no avail. I listened patiently to counsel who liberally took me through the Byzantine permutations of the e mail correspondence in this case about who said what to whom about the various potential sources of alternative capital to repay the loan and satisfy the calling-up notice. However, the glaring and obvious fact remains, Tanya Murray did not put money where her mouth was and the debt remains outstanding. I did not consider it unreasonable that the pursuers wanted some concrete proof that Tanya Murray was in or could obtain funds to repay the debt. The various offers of loan lodged in process are not in my opinion proof of liquidity on her part. If she had access to these funds she could I assume, with the defender’s consent, have novated the loans and assumed the debts. This never happened. Towards the end of his submissions, counsel informed me that Playfair Investments remains in administration but when that ends, later this year, there will be enough money available to satisfy the present securities. In some way, unspecified before me, the defender’s finances are tied-up with those of Playfair Investments. Well, all this, to my mind, is just more promises. It is often said fine words butter no parsnips. The pursuer has waited long enough and in my opinion is now entitled to enforce its security. I dismiss this aspect of the defence. I am not persuaded that decree would be unreasonable in the circumstances of this case.

The punitive interest rate applicable in the event of default

[37] Finally, counsel argued under reference to authority that the pactional rate of default interest is unenforceable. The defender’s contention was that the default interest rate of 2.5 per cent is a penalty rate and should not be enforced.  In the event the court was minded to grant decree of possession, counsel argued for reduction ope exceptionis of the default interest rate, contained in clause 5.3 of the agreement, and the 5 per cent charge, contained in clause 6.3, which it was submitted, was a penalty. Miss Cargill argued that the parties were both legally represented when the agreement was entered into. The enhanced default interest rate and the facility fee of 5 per cent in the event of breach were not extortionate and the court ought not to interfere with the freedom of parties to contract on the market.

[38] I can deal with this aspect of the defence very shortly. Corporate parties enjoy freedom of contract. This is an action for possession of property. It is not an action for payment. The enforceability argument, if relevant at all, is only relevant to an action for payment of the sums due in terms of the agreement. It has no bearing on whether possession should be granted as a remedy, following calling-up. As the enforceability of the terms of the loan agreement, in the event of breach, have no relevance to the crave sought, it is, accordingly, unnecessary within this process to express any opinion, on these specific terms of the agreement.

Conclusion.

[39] For the reasons stated, I shall grant decree of declarator and warrant for possession with expenses, as sought by the pursuer.

 

Sheriff T Welsh QC

Edinburgh Sheriff Court

31 August 2015