Standard security holders enforcing their security should be subject to a duty to conform to reasonable standards of commercial practice, the Faculty of Advocates has stated.
Faculty was responding to the Scottish Law Commission discussion paper on Heritable Securities: Default and Post Default, which sought views on how best to achieve a streamlined process for enforcing a security as part of its review of the law of heritable securities.
The advocates' professional body believes that conforming to reasonable standards of commercial practice would ensure consistency between heritable and moveable securities. “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”, the response maintains.
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.”
Responding to whether new legislation should restate the principle prior tempore, potior jure (ranking according to date of registration) as it applies to security over heritable property, Faculty believes that 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,” Faculty says. “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’.”
It further suggests that remedies should be exercisable on a breach of any of the secured obligations, rather than the vaguer test of "failure to perform". Service of a default notice should continue to be required prior to exercising any remedies, but a single notice should replace the separate notice of default and calling-up notice.