Commercial Property Standard Securities

Standard Securities were created by the Conveyancing and Feudal Reform (Scotland) Act 1970 and since it came into force have been the only way of securing a debt against heritable property.

Funders become known as heritable or secured creditors provided the Standard Security in their favour over the heritable property has been registered effectively in the Land Register or the General Register of Sasines. Limited Company borrowers also require to register the Standard Security in the Register of Charges within 21 days of its creation.

The heritable creditors lending will thereafter be repaid from the sale proceeds in preference to that of any non secured creditor.

Such secured lending can be granted for many purposes other than the purchase of heritable property. For example properties already owned can be used as security to fund other acquisitions, finance a business etc., provided that the funders' lending criteria are met in full and there is enough equity in the particular property to support the borrowings.

The onerous nature of a Standard Security should not be under-estimated. It is no coincidence that the word "mortgage" comes from two French words - "mort" - "dead" and "gage" - "pledge".

If the lending conditions are breached and most especially if repayments fall into arrears a heritable creditor can "Call up" its security. This can be effected by serving a Calling-up Notice or a Default Notice requiring payment of the whole debt, not just the arrears, within a specified period. In the case of a Calling-up Notice this period is two months.

If the breach has not been remedied within the relevant period, a heritable creditor may recover possession of the security subjects by way of "decree" and eviction by Sheriff Officers.

Non payment is a fact and it is very difficult to put up a stateable defence.

In the case of residential properties where there is a sole proprietor, additional information is required in terms of the Matrimonial Homes (Family Protection) (Scotland) Act 1981, as amended, to make the heritable security entirely effective.

If the proprietor is unmarried an Affidavit in statutory form stating that the subjects are not a matrimonial home must be granted. In the case of a married heritable proprietor where the family home is being put up as security then the "non entitled spouse" (the party not named in the Title) must either consent to the borrowing, again in a statutory form, or renounce any occupancy rights in the property. It is imperative that the "non entitled spouse" obtains independent legal advice before signing either of the foregoing as breach of the lending conditions by the borrower could result in the family home being repossessed.

Independent advice is equally necessary where the Standard Security is being granted by joint named proprietors to secure the debts of one of them. Recent court decisions have highlighted clearly the danger to heritable creditors of the lack of same. Unless it can be established that the consent of the borrower's co-proprietor was given freely in the full knowledge of the nature of the debt the co-proprietor may be able to plead successfully that the debtor induced him or her to sign by misrepresentation or threat.

Once the heritable creditor has entered into possession of the security subjects it can exercise its power of sale granted in terms of the 1970 Act. While there is a duty to obtain "the best price", what this means in effect is that it takes all reasonable steps to ensure that the price at which the property is sold is the best which can be reasonably obtained. This may or may not clear the outstanding loan and arrears. The borrower will remain liable for any shortfall.

For further information please contact Morinne Macdonald.