This Advice Note was drafted by the Property Law Committee in consultation with the Scottish Government and the Council of Mortgage Lenders (“the CML”)
When local authorities in Scotland provide financial assistance to homeowners to assist with adaptation, repair or improvement of their home, they tend to file a Notice of Payment of Grant (a ”Notice”) with the Registers of Scotland. These Notices are statutory in their form and are based on provisions contained in the Housing (Scotland) Act 2006. The grant monies tend to be relatively small in relation to the value of the property and are non –repayable provided the property is used as a dwelling-house, used as a principal residence and maintained in good order.
If required to do so by the Local Authority, the homeowner must certify that the conditions are being observed (insofar as they still apply). The Notice transfers with the property when it is sold. At the end of the period of grant, the Notice is no longer enforceable. It is rare for a Local Authority to seek repayment and it will only be in circumstances where the Local Authority can prove that the conditions of the Notice have been breached, that they will do so. With the consent of the Scottish Ministers, local authorities can suspend or disregard a breach in the conditions if the owner is not at fault.
Disclosure requirements under the CML Handbook
Solicitors are bound by the terms of Clause 6.13 of the CML Handbook:
6.13.1 Where the property is subject to an improvement or repair grant which will not be discharged or waived on settlement, check part 2 to see whether you must report the matter to us.
This will normally involve reporting the existence of a Notice to the lender.
Attitude of some lenders
Some solicitors report that the lender has sought to have the borrower repay the grant because it regards the Notice as a prior charge against the property. This has obstructed the progress of loans secured against properties subject to a Notice. As an alternative, some lenders request that a ranking agreement be entered into to preserve the lender’s first-ranking status.
The Scottish Government’s Response
In 2013, the CML was contacted by the Scottish Government on behalf of the Deputy First Minister who has had the issue raised directly with her. The Scottish Government is concerned about the potentially adverse impact on the workings of the Notices system.
Legal constitution of Notices
A Notice does not constitute a heritable security over the property as the only way to create a heritable security over land in Scotland since 1970 has been by way of a Standard Security. The Notice only becomes a charge upon default and, provided there is no default, it will never legally be treated as a charge and does not meet the criteria to become a Standard Security. Therefore the Lender will still receive a “First Charge” over the property.
Registers of Scotland (“the Keeper”)
The Keeper shows Notices of Payment of Improvement/Repairs Grant in Section C (the Charges section) of the Land Certificate in accordance with provision 6(1)(b) of the Land Registration
(Scotland) Rules 2006 ("the Rules"), which provides that “particulars of any debt, including a pecuniary real burden affecting the interest” should be included in Section C.
Section 2 of the Rules provides the interpretation of the word "debt" as follows:
"debt" has the meaning assigned to it by section 9(8)(c) of the Conveyancing and Feudal Reform (Scotland) Act 1970 which is currently defined as “any obligation due, or which will or may become due, to repay or pay money, including any such obligation arising from a transaction or part of a transaction in the course of any trade, business or profession, and any obligation to pay …. other periodical sum payable in respect of land, and " creditor " and " debtor ", in relation to a standard security, shall be construed accordingly”.
On this basis, the Keeper is of the opinion that Notices of Payment of Improvement/ Repairs Grants lie squarely within the definition of “debt” (because they constitute an “obligation….which…may become due”) and should consequently be shown in Section C of the Land Certificate.
There is a body of opinion that Notices should be placed in Section D (the Burdens section) but the Keeper currently has no intention to change her practice. Additionally, the Keeper’s practice is consistent with that of HM Land Registry in England and Wales.
CML has spoken to one large firm of solicitors who act for a number of lenders in repossession matters in Scotland. These solicitors have stated that in practice, when selling a repossessed property which is subject to such a Notice, they obtain a letter from the Local Authority which states that no sums are repayable providing the conditions continue to be met. The Local Authority also lists the conditions, and the sellers’ solicitors would then provide this letter to the purchasing solicitor along with the title deeds. According to the sellers’ solicitors, such procedures have resulted in no adverse issues to date. They have not had to pay any sums on behalf of a lender client and have not been asked to do so by a purchasing solicitor.
Notwithstanding the existence of a Notice, a lender will have a first ranking security over the property which will make their mortgage compliant with the Mortgages: Conduct of Business (MCOB) Sourcebook/ manual, although technically if the property was sold and the borrower had not adhered to the Notice conditions, then the grant made under the Notice would have to be repaid from the sale proceeds.
Although the provision of grants by Local Authorities under the Notice system is a long-standing practice, since the banking crisis, lenders have tightened up on their lending criteria and also on their auditing procedures. This has resulted in the issue of outstanding Notices coming to greater prominence and there being a greater awareness among solicitors regarding the need to disclose such matters to lenders.
However, in terms of CML Handbook requirements, lenders should not consider Notices an obstacle to their taking first charge on a property.
Lenders seeking repayment and discharge of Notices or ranking agreements in relation to Notices, should review their practices in regard to such Notices and should accept that notwithstanding any Notice, they are still obtaining a first/prior security over the property.