Faculty responds to review of heritable securities law

SECURITY holders exercising a standard security should be subject to a duty to conform to reasonable standards of commercial practice, says the Faculty of Advocates.

The Faculty was responding to a Scottish Law Commission Discussion Paper on Heritable Securities: Default and Post Default, which sought input on how best to achieve a streamlined process for enforcing a security.

This is the second of three consultation papers from the Commission as part of a review of the law of heritable securities. The first, published in June 2019, centred around pre-default issues such as creation and assignation of standard securities. The third, currently scheduled to be published early next year, will cover sub-security arrangements and securities over non-monetary obligations. The Commission plans to draw the results from all three papers into a final report, including a draft Bill, in 2025.

Conforming to reasonable standards of commercial practice would ensure consistency between heritable and moveable securities, said the Faculty. “We recognise that it will add some complexity to enforcement and will impose a burden on lenders but we do not consider that, in general, that would be seen as unreasonable.”

Imposing such a duty had the advantage that as standards evolved over time, so too would the requirement.  “Most importantly, it will apply in those situations where the security holder is not otherwise subject to regulation. These might be thought to be the situations where the borrower is most in need of protection,” said the Faculty.

Responding to whether new legislation should restate the principle prior tempore, potior jure as it applies to security over heritable property, the Faculty said in order to maintain consistency, this principle should be left to the general law.

“Legislation should continue to make provision for a subsequent security holder to restrict the priority of an earlier standard security by giving notice. If this is not done, the existence of an all-sums security would mean that the debtor would in practice be unable to borrow against remaining equity in the subjects of the security,” said the Faculty. “As part of the purpose of securities is that a person owning property should be able to exploit its value to obtain borrowings which may provide economic and/or personal advantage, it is desirable that this portion of equity should not be ‘sterilised’.”

The Faculty’s full response can be accessed here