A lender in Scotland requires to take 'reasonable' steps to agree proposals with their customers before embarking on court proceedings for possession of a residential property.
A recent case has looked at the question of what is 'reasonable', where a lender will not be repaid in full from the sale. We examine the court's findings below.
In 2010, the Scottish Government introduced a number of pre-action requirements with which lenders required to comply before they could raise an action to take possession of a dwellinghouse for non-payment of a mortgage loan.
Central to those requirements is a condition that lenders must make 'reasonable efforts' to agree proposals with their customer in relation to future payments under the mortgage, and more generally that a decree for possession can only be granted by the court where it is 'reasonable in the circumstances' to do so.
In most cases what is 'reasonable' might appear obvious. However, there are always shades of grey. A recent judgment of the Inner House of the Court of Session (available here) has added some clarity to what is reasonable for a lender to do when faced with an apparent shortfall.
The case involved a substantial loan over a property owned by a couple who appear to have had little in terms of means by the time of the events in question. One of the parties was bankrupt, and the report suggests that they survived on state pension income.
The couple accrued substantial arrears, and the lender began to pursue them. The dispute centred upon a valuation obtained by the customers which showed that the property was valued at £350,000. A further valuation 2 years later came out at £300,000. This was significantly below a previous valuation undertaken by the lender which showed a valuation of around £750,000. The issue was of importance as the lending appeared to have escalated to around £700,000 with interest. As there was a first charge holder who would rank ahead of the lender in this case, a valuation of £300,000 would have meant them accepting a fraction of what was owed, if anything at all.
One possible reason for the lower valuation was given as a potential access issue affecting the property. A proposal was made by the customer's daughter and her husband to purchase the property at the valuation price of £300,000.
The lender rejected that offer. In response, the lender asked that the titles be checked in order to establish whether there truly was an access issue, after which they would obtain a further valuation, and indicated that discussion could be had from there. There was protracted correspondence on this issue between solicitors, but ultimately the titles were not produced and no alternative valuation was prepared. The lender proceeded to raise court proceedings.
The issues before the court centred on whether (a) the lender had made reasonable efforts to agree proposals with their customer; and (b) whether it was reasonable in all the circumstances to grant a decree for repossession.
In relation to issue (a), it was contended that the lender had in effect refused to enter into any form of negotiation and simply refused the offer without putting forward a reason for doing so, they had simply said that they did not agree with the customer's valuation.
The argument in relation to issue (b) was in a similar vein, and contended that the lender would only have been acting reasonably if they were in a position to show that they would obtain a materially better outcome proceeding with repossession than they would accepting the offer. To do that they would have to show that the value of the property was higher than the customers' valuation suggested.
The court's findings
The court found for the lender. It was held that the purpose of the pre-action requirements was to prevent creditors proceeding directly to court without any attempt at communication with their customers or seeking to find some accommodation which would enable the customer to continue in occupation of the subjects.
The court found that this was far removed from what had happened in this case. It was reasonable for the lender to ask for the titles in order to inform their own valuation. When those titles were not forthcoming - and after a significant amount of correspondence on the point - they were entitled to take the action which they did.
Of potentially more significance, the court held that where a lender had fully explored settlement, there was no burden on the lender to prove that a sale would achieve a higher price than the customer's valuation suggested. It is widely accepted that a sale on the open market would achieve best price, and in the circumstances of this the lender was entitled to take action and to "test the market", rather than agree to accept less than payment in full. It was noted by the court that at no point had the customer suggested a sale on the open market.
In summary the court's view was that 'the changes introduced by the 2010 Act were not designed to limit a creditor's contractual entitlement to recover the full debt, nor to prevent steps designed to maximise the recovery. [Rather] the 2010 Act protect[s] against unreasonable conduct adopted by a creditor in pursuing that objective'.
The key message for lenders is that efforts must be made to seek an accommodation with a customer and serious consideration must be given to proposals made by a customer. However a lender is entitled to question the customer's position, and is entitled - where that position is explored and no agreement can be reached - to take action in order to maximise their recovery.