OneSavings Bank v Burns and its impact on repossessions within traded mortgage portfolios

A decision from Banff Sheriff Court has come as a bit of a ‘bolt from the blue’ for lenders who have sold or acquired secured loans in Scotland. The d

A decision from Banff Sheriff Court has come as a bit of a ‘bolt from the blue’ for lenders who have sold or acquired secured loans in Scotland.

The decision is not binding but is on the face of it sound in logic and we suspect it will be followed in other courts if raised by customers or their lawyers.

The issue at the core of the case is the failure by lawyers – acting for the lender in the transfer of a standard security (legal charge) – to follow a prescribed statutory process. The challenge for the legal and lending industries is that this failure has been the basis of the widely accepted and adopted methodology common in the Scottish ‘mortgage trading’ marketplace.

What is an assignation?

A lender’s interest in a standard security (legal charge) can be sold or transferred (between group companies, for example). The Keeper of The Registers of Scotland is given notice of this by ‘application to register an assignation’. In cases where a large number of securities are being assigned by one lender to another, the assignation will need to be registered against every title affected and is achieved by a ‘multiple title number assignation application’.

The assignation is given effect to by adding a footnote to the relevant entry in the securities section such as: ‘Note: The above Standard Security was assigned to (New Creditor) (designation) conform to Assignation registered (date)’.

The facts

A judgement was issued by Sheriff Mann at Banff Sheriff Court on 30 March 2017 in the case of OneSavings Bank v Burns.

On the face of it, this was an ordinary residential mortgage repossession case raised under the Summary Application Procedure. However, arguments raised by the defenders’ solicitor (and accepted by the Sheriff) have called into question the validity of all ‘bulk assignations’ or ‘portfolio transfers’ (transferring large volumes of standard securities) in Scotland over the last three decades.

The matter of significant interest to lenders, who have acquired or transferred secured loans, will be OneSavings Bank’s (OSB’s) failure to convince the Sheriff that they were heritable creditors (secured lenders) in terms of a standard security which was assigned from GMAC-RFC to JP Morgan Chase Bank in 2008 and then from JP Morgan Chase Bank to OSB in 2012.

The Burns’ solicitor’s position was that OSB did not have ‘title to sue’ (the legal ability to raise proceedings) as the assignation was not sufficiently compliant with the form of words prescribed by the Conveyancing and Feudal Reform (Scotland) Act 1970 (‘the 1970 Act’). His rationale for this position was as follows:

That the assignations were not valid as they related to multiple securities and the form of assignation prescribed by the 1970 Act related only to assignation of a single security; and

That the assignations were not valid because they did not include the words which were required to be added by Note 2(1) in Schedule 4 to the 1970 Act, specifically the words ‘to the extent of £ being the amount now due thereunder.’

What the Sheriff said in his judgement

The Sheriff found that the fact that the assignations were designed to assign multiple standard securities was not an insurmountable issue and that such a form of transfer did not affect the validity of the assignations per se. That said, where the standard security is for a fixed sum or certain amount, any assignation must conform with the form prescribed by Form A of Schedule 4 of the 1970 Act and state the amount due under the security.

Where the standard security is for an uncertain amount, an assignation must conform with Note 2(1) to Schedule 4 of the 1970 Act and can describe the security in shorthand as ‘all sums due or to become due’ but there is still a mandatory requirement to include the words ‘to the extent of £ being the amount now due thereunder’.

As a result, Sheriff Mann found that the standard security did not vest in OSB as the assignee and that they therefore had no title to sue (and seek a warrant to repossess and sell).

Scottish bay

Do the Burns have to keep paying their mortgage?

Sheriff Mann also stated that the decision was a ‘reluctant one’ as Mr and Mrs Burns were aware that OSB was their lender and that they were aware that the debt was required to be repaid to them. The Sheriff was also of no doubt that OSB had other effective remedies against the Burns’ in the circumstances (for example, an unsecured or bankruptcy action).

The contractual obligation to repay the mortgage monthly or at the end of the term is not impacted by the decision.

What is the impact of the decision on a lender’s ability to repossess?

We understand that the overwhelming majority of mortgage portfolio or bulk transfers have been conducted using the same methodology as discussed in OSB v Burns. Any acquiring lender whose solicitors used the same methodology as the firm in OSB v Burns could find themselves unable to repossess a secured property where the customer is in arrears or their mortgage has reached the end of its term without repayment.

The decision is not binding on other Sheriff Courts in Scotland, but it will be persuasive to Sheriffs and will inevitably be raised by the customer and/or their agents. Where a lender has raised an action for repossession without the appropriate ‘title to sue’, they will more than likely be found liable for the expenses of the action.

How have banking firms been assigning loans in Scotland?

In short, it would appear that the accepted practise by most banking firms in Scotland is the one outlined in OSB v Burns.

A prominent Scottish banking firm writing on the subject in response to the OSB v Burns case recently stated in an article that: ‘It has for the past 25 years been market practice in Scotland to alter the … form of assignation in cases (being the majority of cases) of “all sums” or “fluctuating advance” standard securities so that the assignation did not state the specific amount due. ‘

Are all assigned mortgages affected?

Not necessarily. The decision only affects mortgages which have had their ‘legal title’ transferred from one lender to another using the ‘OSB v Burns methodology’ – that is likely to be a lot of mortgages though!

Where only the ‘beneficial title’ has transferred (i.e. where the legal title of the mortgages has remained with the original lender and the mortgages are then held in trust for the assignee) the decision will have no impact whatsoever.

Are affected loans now unsecured?

The OSB v Burns decision does not automatically discharge or release the original standard security granted over the customer’s property. The existing standard security will still be on the title sheet of the customer’s property and The Keeper of the Registers of Scotland is yet to make its position clear as to what it would do if, for instance, a fresh assignation ‘conforming’ to OSB v Burns were to be presented to them.

If we accept OSB v Burns is correct, what can we do in order to mitigate risk?

Rectification of the Land Register in most cases is likely to take the form of a fresh legal title transfer of the standard security by the original legal title holder in favour of the assignee. In some cases this could be done using a power of attorney that may have been granted in relation to the original portfolio transfer. In other cases it may require the co-operation of the original lender. The latter will be trickier if the transferor is no longer on the Register of Companies (i.e. dissolved or wound up).

Lenders will also have to decide as to whether they wish to adopt a ‘case-by-case’ approach or whether their appetite for risk dictates a ‘wholesale re-assignation’.

That said, it is not clear whether such ‘fresh transfers’ would indeed be accepted by The Keeper for registration or whether they would first require an action to be raised at the Court of Session for reduction and rectification of the Land Register. We are engaging directly with The Keeper at this time and hope to be able to clarify their position in due course.

If we suffer a loss, where might our remedy lie?

Lenders may be able to benefit from a ‘statutory warranty’ or compensation from The Keeper of the Registers of Scotland. A number of hurdles would however need to be overcome and loss would have to be proven.

Should The Keeper not offer a warranty or compensation then there may be recourse against the solicitor completing the bulk assignation.

There may also be recourse against a seller in terms of mortgage sale agreement warranties. Parties who have sold either legal or beneficial title to Scottish mortgages under mortgage sale agreements will generally have given warranties as to the title they are selling.

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