In Royal Bank of Scotland plc v Mirza the Sheriff Appeal Court considered arguments relating to the application of the pre-action requirements incumbent upon secured lenders under the Home Owner and Debtor Protection (Scotland) Act 2010 (“the 2010 Act”) if such secured lenders sought to repossess a property under a standard security. Where applicable, compliance with the 2010 Act requirements is compulsory if a standard security is to be enforced.

The 2010 Act was intended to protect borrowers who had granted a standard security over their home. The pre-action requirements of the 2010 Act, therefore, only apply where the property in question is used “to any extent for residential purposes”. This definition has proved problematic; for example, if residential property was used as security for commercial lending, the borrower did not live in the property but it was nevertheless used as residential property, for example, by a tenant- was it still used to “any extent for residential purposes”?

Background

RBS sought to enforce a standard security granted over a property which had been purchased using a buy-to-let mortgage and had been let to tenants. The borrower sought to argue that the property was being used for residential purposes and, therefore, that the lender could not enforce the standard security without first complying with the pre-action requirements in the 2010 Act.

By way of background in a similar case in 2015, Westfoot Investments Ltd. the Sheriff had concluded that a residential flat that was now empty, but had been used previously for residential purposes, could not be considered to be protected by the provision of the 2010 Act; ‘residential purposes’ meant use ‘as a home’ by the granter of the standard security and not anyone else.

In line with Westfoot, the Sheriff in Mirza found that the provisions of the 2010 Act only applied to those “debtors for whom the security subjects were their home.”

As the occupants of the property were tenants of the borrower the Sheriff was satisfied that the borrower was not using the property for residential purposes and, therefore, confirmed that the lender could enforce the standards security. The Sheriff’s reasoning was accepted by the Sheriff Appeal Court on appeal.

What does this mean?

Secured lenders will welcome the decision in Mirza. The pantomime of having to comply with the conditions of the 2010 Act in cases involving by-to-let or vacant properties can now be avoided. Even with this decision, tenants of buy-to-let landlords are still protected since it has been established law for over 20 years that secured lenders must raise separate proceedings against tenants in order to evict them.

Further information on the creation, operation and enforcement of standard securities is available.