Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 65

XA142/14

Lord Brodie

Lady Dorrian

Lord Malcolm

OPINION OF THE COURT

delivered by LORD MALCOLM

in the cause

SWIFT ADVANCES PLC

Pursuers and Respondents;

against

JAMES BAIN MARTIN AND OTHERS

Defenders and Appellants:

Act:  O’Brien;  Ledingham Chalmers LLP

Alt: J T Young;  Drummond Miller LLP

4 September 2015

[1]        In 2007 Mr and Mrs James Martin borrowed £426,000 from Swift Advances plc (Swift) secured over a residential property.  The terms included 300 monthly repayments of £4,127.  Against a background of continuing non-payment of the monthly sums, in January 2012 Swift served calling up notices.  Later that year proceedings were commenced in Kilmarnock Sheriff Court in terms of the Conveyancing and Feudal Reform (Scotland) Act 1970, as amended by the Home Owner & Debtor Protection (Scotland) Act 2010.  The action sought power to enter possession of the subjects and exercise all rights available to the creditor, including sale.  As at the date of the proof, the arrears amounted to £182,500, equivalent to over 42 months.  The outstanding balance was in the order of £638,000.

[2]        The main issues before the sheriff were (1) whether Swift had complied with the pre-action requirements set out in section 24A of the 1970 Act, and (2) whether, in terms of the pre-condition set down by section 24(5), it would be reasonable in all the circumstances to grant the orders sought.  The sheriff answered both questions in the affirmative and found in favour of Swift.  An appeal to the sheriff principal on both issues was refused.  Now this court is asked to find for the debtors on one or both of said issues, and to set aside the sheriff’s interlocutor.  In outlining the background, since much turns upon communications between the parties’ solicitors before the commencement of the current proceedings, they will be recorded in some detail. 

The background circumstances

[3]        Mr and Mrs Martin are the joint owners of the subjects.  Mr Martin is sequestrated. He does not enjoy good health.  Previously Mrs Martin had little to do with their financial affairs, but in 2008 she discovered papers indicating that they were in arrears on the mortgage.  They were unable to make consistent or regular payments, and so, over time, the arrears increased.  The subjects form part of a larger property, of which the other part is owned and occupied by their daughter and son-in-law, Natalie and Douglas Henderson (the Hendersons).  There is a shared roof and driveway.  Consideration was given to putting the subjects on the open market, but the anticipated estate agents’ fees could not be paid.  There is a prior standard security in favour of the Britannia Building Society, and the Martins were in default in respect of both arrangements.  They are in receipt of pension income only, and, leaving aside the said subjects, have no funds to meet their obligations to Swift.  Their daughter and son-in-law have tried to assist with their financial affairs, and were prepared to purchase the subjects on the basis of a valuation prepared by Messrs DM Hall, chartered surveyors.  Such a report was obtained in October 2010, which brought out a valuation of £350,000, a sum considerably below the valuation of £750,000 obtained from different surveyors some three years earlier at the time of the loan.  A more recent DM Hall report of July 2012 indicated a value of £300,000.

[4]        So far as the pre-action communications are concerned, the available documentation begins with a letter dated 4 October 2010 from Mr Smith, solicitor, of Clarity Law on behalf of the defenders, to Mr Lang, of Messrs Mellicks, solicitors, acting on behalf of Swift.  At that time there was an earlier outstanding action at the instance of Swift against the defenders in Kilmarnock Sheriff Court, also for possession of the subjects and other relevant powers.  Mr Smith had recently been instructed in place of other solicitors who had been acting for Mr and Mrs Martin.  Mr Smith noted that in Swift’s most recent letter to those solicitors they had indicated a current market valuation of the subjects of £600,000.  He asked for a copy of that valuation.  A contemporary email from Mr Smith to Mr Lang stated that Mr Smith was going to suggest to his clients that a full home report be conducted by DM Hall to “provide a clear market valuation”.   Their daughter and son-in-law had advised him that they may be able to purchase the subjects, depending upon the market value.  The next day Mr Smith forwarded a letter to Mr Lang advising that the Hendersons would offer to purchase the subjects at the valuation set out in the report.  In response, Mr Lang made reference to a drive-by valuation at a figure of £600,000 carried out on behalf of Swift.  He did not have a copy of this on his file. 

[5]        Mr Smith sought to negotiate a resolution of the sheriff court proceedings upon the basis that the defenders would accept an offer from the Hendersons based upon the DM Hall report, and use the proceeds “to pay the securities to both your client and the first charge-holder”.  Once in receipt of the available funds, it was suggested that Swift would “provide the defenders with the usual discharge of loan”.  In the meantime 50% of the monthly repayments would be made. 

[6]        On 28 October 2010 Mr Lang responded by stating that various matters required to be clarified, and, for the avoidance of doubt, that his clients would not accept anything less than payment in full before granting a discharge.  He suggested that the first step towards resolving the matter was for the home report to be produced.  “Once the valuation is known we can ascertain how that plays into your clients’ indebtedness to Swift”.  Thereafter, so long as Swift were to be paid in full, the solicitors could turn to the purchase transaction proposed by the Hendersons.

[7]        Some of the correspondence is missing from the productions, but in due course the home report was obtained stating a valuation of £350,000.  Mr Lang contrasted this with the Mortgage Rights Minute in which the debtors ascribed a value of £750,000 to the subjects.  He was taking instructions from his clients.  He rejected a time limit which had been proposed by Mr Smith, commenting that it would simply “polarise positions”.  On 6 December Mr Smith responded by indicating that his clients would withhold the interim mortgage payments, which it was intended would be provided by the Hendersons, “until such time as your client is in a position to fundamentally provide clarification over their position”.  This ultimatum was thought to be appropriate since it was unclear whether Swift did or did not intend to repossess.  Mr Lang replied to the effect that there could be no repossession any time soon, and that a failure to maintain the monthly payments would “simply make a bad situation worse”.  In the event the interim payments were withheld unless and until there was a decision to avoid repossession.  Mr Smith urged a decision from Swift by close of business on 23 December 2010, otherwise no further payments would be made and the defenders would seek alternative accommodation.

[8]        Come January 2011 no such decision had been taken, and the case was continuing to call in Kilmarnock Sheriff Court.  In the light of “ongoing settlement discussions” Mr Smith suggested a sist of the case.  While the exact details are not clear, it is apparent that the original action was ended with a view to exploring a resolution without the need for further litigation. 

[9]        On 23 March 2011 Mr Lang wrote to Mr Smith stating that his clients were surprised and concerned as to the value placed upon the subjects in the DM Hall report.  In addition, Natalie Henderson had suggested to Swift that there was a problem with access to the subjects, in that access could be exercised only with the consent of the owners of their property.  “This is obviously a matter which our clients require to clarify”.  Mr Lang had obtained extracts of the title deeds, together with the standard security in favour of the Britannia Building Society.  However the plans were in black and white, which limited their value.  Mr Lang expressed certain views as to the effect of the deeds as to rights of access and the like.  He ended by stating that it would be in everyone’s interests that the extent of the respective properties and the rights of access be clarified.  He asked Mr Smith to obtain the principal deeds, including coloured plans, from Britannia, who, as holders of the first security, had possession of them.

[10]      On 26 April 2011 Mr Smith indicated that, while he had spoken to his clients, he had no instructions to order up the title deeds.  However he would speak to them again and revert on the matter.  He pressed what he described as “the main issue”, namely that Swift should accept the market valuation offer from the Hendersons and discharge the additional monies due by the defenders.  He noted that many months had passed without an answer on this point. 

[11]      On 16 May 2011 Mr Lang noted that the market valuation would depend upon the rights of access.  Swift’s information was that the value of the property was considerably in excess of the valuation placed upon it by DM Hall, however ascertainment of the value of the subjects depended upon the question of access being resolved.  The matters raised in the letter of 23 March were relevant to the “main issue” and required to be clarified before matters could be progressed.

[12]      On 11 July Mr Smith replied.  The first security holders had raised proceedings and a repossession decree had been granted by the sheriff at Kilmarnock.  It was understood that they would accept the offer to be made by the Hendersons, and provide the necessary discharge.  It was hoped that Swift would do the same.  On 27 July Mr Lang observed that the difficulty was the disagreement as to the market value of the property.  He reminded Mr Smith as to the request set out in the letter of 23 March.  On 2 August Mr Lang wrote to the agents for the Britannia Building Society informing them as to the situation as between Swift and the debtors.  This included the dispute as to the assertion that access to the property was limited and subject to the Hendersons’ consent as owners of the adjoining subjects, and it was noted that the Hendersons’ views on market value did not coincide with those of his clients. 

[13]      On 4 August 2011 Mr Smith asked Mr Lang for vouching as to Swift’s disagreement as to the market valuation.  On 22 August he said that the Hendersons would be submitting a purchase offer in the near future.  On 30 August he asked why Swift had not instructed its own valuation.  Britannia had extracted its decree and a decision from Swift was required as a matter of urgency, given that a market value offer would be made.  Failing a substantive response within 7 days, attention would be turned towards the Financial Services Authority.  On 30 August Mr Lang observed that Swift’s concern as to market value was based upon their belief that Mr Smith’s clients may have misinterpreted the titles of the adjoining property.  This had been the subject of the letter in March to which there had been no substantive response.  He stressed that the security would only be discharged if Swift were satisfied that the property was sold for its correct value.  To facilitate this Mr Smith should respond to the letter of 23 March.  Letters having crossed, Mr Lang wrote again on 31 August reiterating that, at least in part, Swift’s concern was that the low valuation was caused by the view taken as to access rights, a view which was not shared by his clients.  The earlier J & E Shepherd valuation report obtained by Swift when the loan was advanced was considerably higher than the DM Hall valuation.  Again reference was made to the letter of 23 March.  It would only be when this issue was clarified that the valuation would be instructed.  To allow matters to be resolved quickly, Mr Smith was invited to provide his response to that letter.

[14]      On 23 September 2011 Mr Smith began the latest item of correspondence by saying that the situation in the case was “becoming incredulous”.  It was for Swift to disprove DM Hall’s valuation.  He called on Mr Lang to provide details within 14 days of the surveyors nominated by Swift, otherwise the only recourse would be to the Financial Services Authority Ombudsman.  Notwithstanding the tone of Mr Smith’s letter, Mr Lang replied in moderate terms on 10 October, agreeing that the appointment of surveyors to value the property was desirable, however a meaningful instruction and valuation could not be obtained until the extent of the second property, and the access rights enjoyed by it, had been clarified.  A lot of time had been lost since the letter in March, but if the principal title deeds could be obtained by Mr Smith, it was hoped that the matter could be resolved in early course.

[15]      On 28 October Mr Smith replied that he was endeavouring to obtain the principal title deeds.  On 1 December, Mr Smith was asked whether the deeds had been obtained.  Swift were becoming concerned as to the equity situation and had advised that unless prompt progress was made they would have to raise proceedings.  By this stage Mr Brendan Collins was dealing with the matter at Mellicks.  On 13 December Mr Smith told him that electronic copies of the titles for the two properties had been obtained.  They did not match.  As a result he required to approach Britannia for the original titles.  He understood that Swift were pressing Mellicks to proceed with a repossession.  He stated that in all the circumstances he could not stop this occurring.  However he suggested that such “would be nothing short of your clients shooting themselves in the foot”.  Mr Collins replied that calling up notices were being served, however, the two months period would allow time for Mr Smith to obtain the titles from Britannia and for these to be examined with a view to resolving the boundaries issue.  In the event, by letter of 16 March 2012 Britannia told Mr Smith that they were unable to send the deeds to him because he was not on their panel of conveyancers at the address in his letter.  He would require to submit a written request to be added to their panel.

[16]      There followed some correspondence concerning whether Swift was or was not acting reasonably by proceeding to repossession.  In a letter of 17 May 2012 Mellicks noted that for over 20 months no payments had been made to reduce the ever increasing arrears.  Given the level of the arrears the service of calling up notices was said to be entirely reasonable.  On 20 April 2012 Swift had informed Mr and Mrs Martin that on the expiry of the calling up notice period they would instruct the issue of proceedings seeking repossession of the property.  The extent of the arrears and the outstanding balance were mentioned.  It was not too late for them to seek an accommodation with Swift, and they could obtain advice from any Scottish solicitor or any Citizens Advice Bureau or similar organisation.  Mr Smith wrote to Mellicks objecting to that direct communication.  An issue was raised as to the competency of the method of service of the calling up notices, however nothing now turns upon this.  On 4 July 2012 the Hendersons, through their solicitors, submitted an offer to the debtors to purchase the subjects for £300,000.  None of this prevented Swift from re-raising court proceedings.

The grounds of appeal

[17]      The first and second grounds of appeal contend that Swift did not comply with the pre-action requirements  introduced in 2010 and set out in section 24A of the 1970 Act,  as amended.  (Identical provisions were added to the Heritable Securities (Scotland) Act 1894.)  Further provision as to what is required to satisfy the requirements is specified in article 3 of the Applications by Creditors (Pre-Action Requirements) (Scotland) Order 2010.  The third ground of appeal relies on the requirement set down in section 24(5)(b) of the 1970 Act that orders can only be granted if the court is satisfied that it is reasonable in the circumstances to do so. 

The submissions on grounds of appeal 1 and 2

[18]      In the note of argument lodged in support of grounds of appeal 1 and 2, three propositions are put forward.

1.         It is a pre-action requirement that a creditor must make “reasonable efforts to agree with the debtor proposals in respect of future payments to the creditor under the standard security and the fulfilment of any other obligation under the standard security in respect of which the debtor is in default”:  section 24A(3) of the 1970 Act. Properly construed, the proposal to sell the property to the Hendersons at a price determined in accordance with independent and professional advice as to the market value of the subjects was a proposal within the meaning of this pre-action requirement.

2.         Swift did not make “reasonable efforts to agree” to the proposal.

3.         In any event, it is a pre‑action requirement that the creditor must not make an application if the debtor is taking steps likely to result in:

“payment to the creditor within a reasonable time of any arrears, or the whole amount, due to the creditor under the standard security;  and (b) fulfilment by the debtor within a reasonable time of any other obligation under the standard security in respect of which the debtor is in default”:  section 24A(4)(a) of the 1970 Act.

Properly construed, the steps being taken towards selling the property to the Hendersons were steps within the meaning of that requirement.

[19]      In elaboration of the above, the note of argument contends that the relevant statutory provisions do not state that the proposals made by the debtor must be comprehensive or provide for the payment of the whole of the sums due under the standard security.  It is accepted that in many cases proposals for partial payment are likely to be inherently unreasonable and incapable of acceptance by the creditor.  However this is not automatically the case.  Here the proposal put forward by the Hendersons would have led to partial payment of the sums due under the standard security.  Thus the pre‑action requirements in the 1970 Act were engaged.  This is consistent with the overall purpose of the changes introduced by the 2010 Act, which were aimed at ensuring that creditors used repossession proceedings as a last resort, and only after all other reasonable alternatives had been explored.  Such could include a negotiated sale by the debtor of the property.   Article 4(1)(c) of the 2010 Order only states that the property be marketed at an “appropriate price in accordance with professional advice.”  If a reasonable offer is made following upon marketing at an appropriate price, the debtor must accept that offer:  article 4(4).   It was submitted that often there will be numerous reasons why, in circumstances where a sale of the secured subjects is inevitable, a privately negotiated sale by the debtor at market value is likely to be a preferable alternative to repossession.

[20]      In oral argument, Mr Young stressed that the bank needs to demonstrate that there would be some financial advantage flowing from an open market sale.  The Hendersons were prepared to offer the market value for the subjects, as vouched by the DM Hall report.  However, according to Mr Young, there was no engagement by the creditors with the idea of an open market procedure.  Swift simply said that it did not agree with the DM Hall valuation.  Swift was obliged to give reasons for their refusal.  They should have reverted with a competing valuation.  Mr Young suggested that the solicitor for Mr and Mrs Martin was faced with “a brick wall”, with everything “bouncing off it”.  On any view there was no prospect of 100% recoupment from the sale of the property.  The outstanding arrears were almost £700,000.  There was a first charge security holder, and Mr Martin had been sequestrated.  It was unreasonable for Swift’s solicitors to say that their clients would not accept anything less than payment in full.  The correspondence demonstrated that there had been no reasonable efforts to agree to the debtors’ proposals.  Swift “were intransigent.” 

[21]      Reference was made to the final report of the repossessions group set up by the Scottish Government in advance of the 2010 Act.  The group’s recommendations were aimed at ensuring that, once problems emerge, the debtor in respect of residential (as opposed to commercial) borrowings has every reasonable opportunity to sustain homeownership, or to retain the home through some other arrangement, for example as a tenant.   The Government was encouraged to take steps to amend the primary legislation to require lenders to show that they had considered every reasonable alternative to repossession of residential property, and for the courts to consider the extent to which they had done that when deciding upon repossession cases.  Reference was also made to the guidance issued by the Scottish Government on the new pre‑action requirements.  It is clear that proceeding with a court application for possession was viewed by the Scottish Ministers as “the last resort.”  Thus the creditor must be prepared to demonstrate compliance with the pre‑action requirements.  All reasonable attempts to resolve the position should be explored before court proceedings are raised.

[22]      Mr Young stated that “fundamentally” he challenged the proposition that it would always be reasonable for the creditor to seek to recover all of the debt.  It would of course be legitimate to maximise recovery.  However here the proposal was to pay market value.  If a creditor disputed the market value, he had to explain his position.  There had to be reasonable efforts to reach an agreement.  Swift was not entitled to keep its position to itself.  Mr Young submitted that Swift did no more than say that they were not prepared to agree to the valuation.  The position adopted regarding access problems was “not logical”.  The DM Hall valuation was not based upon any express mention of access problems.  Essentially the legislation lays down something equivalent to a “reasonable endeavours to agree” test.  If the creditor has no good reason to refuse a proposal, it cannot raise court proceedings.

[23]      For Swift, Mr O’Brien observed that the contention is that Swift unreasonably rejected the appellants’ proposals.  The 2010 Order is directed to the mechanics of communication between the parties, not to the substance of their discussions.  The sheriff was fully entitled to conclude that Swift had made “reasonable efforts” within the meaning of section 24A.  No realistic proposal had emanated from the debtors.  As the sheriff principal observed, the “reasonable efforts” test addresses whether the creditor has made reasonable and genuine efforts to engage in settlement discussions, not whether a particular offer ought to have been accepted.

[24]      Mr O’Brien stressed that section 24A(3) is directed towards the mechanics of pre‑action communications, not with an assessment as to whether any proposal put forward was reasonable.  That becomes relevant under the overall reasonableness test set out in section 24(5).  The 2010 Order reinforces this interpretation.  On any reasonable reading of the correspondence, it is clear that Swift was not intransigent.  By August 2011 it was recognised that there would be a shortfall, thus the bank was not insisting upon full repayment.  A genuine issue arose as to potential access problems and the need for the principal title deeds.  The action was raised because it became clear that the parties were “going round in circles” - no progress was being made.  There was no rush to court.  It was entirely reasonable for Swift to see the access issue as a possible explanation for DM Hall’s low valuation.

[25]      Turning to section 24A(4), Mr O’Brien submitted that this provision is not concerned with a proposal to sell at a shortfall.  In such cases the creditor cannot be obliged to discharge the security.  Article 4(3) of the 2010 Order suggests that the pre‑action requirements cannot block court proceedings where there will be a shortfall.  In terms of article 4(1)(c), “appropriate price” means a price which will satisfy the debt.  It was common ground that there would be a shortfall. 

Decision on grounds of appeal 1 and 2
[26]      Section 24A(3), when read along with the terms of section 24, required Swift, before it could raise the proceedings, to: 

“make reasonable efforts to agree with the debtor proposals in respect of future payments to the creditor under the standard security and a fulfilment of any other obligation under the standard security in respect of which the debtor is in default.”

Section 24A(4) provides that no application to the court can be made: 

 “if the debtor is taking steps which are likely to result in – (a) the payment to the creditor within a reasonable time of any arrears, or the whole amount due to the creditor under the standard security;  and (b) fulfilment by the debtor within a reasonable time of any other obligation under the standard security in respect of which the debtor is in default.”

In pursuance of the power granted by section 24A(8) the Scottish Ministers made the 2010 Order.  So far as the requirement to make reasonable efforts to agree proposals is concerned, article 3 requires the creditor to make reasonable attempts to contact the debtor;  provide him with details of any proposal made by the creditor;  give him a reasonable time for consideration for any such proposal;  notify him of the creditor’s view of any proposal made by him;  and take into the account the affordability of any proposal for the debtor.  Written reasons for the rejection of any proposal made by the debtor must be provided within 10 working days.  As to section 24A(4), article 4 provides that steps likely to result in payment within a reasonable time include a claim to an insurer under a payment protection policy;  an application to a government support scheme;  and active marketing of the property for sale at an appropriate price in accordance with professional advice. 

[27]      Nothing in the above provisions prevents court action if, after appropriate communications, it is clear that the debtor simply cannot comply with his obligations in full.  The pre-action requirements introduced by the 2010 Act in respect of residential borrowing are designed to ensure that there is a genuine exploration of the possibility of an arrangement being reached whereby, in due course, the default can be remedied, albeit this may require indulgence on the part of the creditor.  The whole tenor of section 24A(3) and (4) is of discussions aimed at an alternative agreement whereby the debtor’s obligations can be fulfilled, for example, on the basis of a lower monthly payment extending over a longer period.  There is nothing to suggest that a proposal to pay only a fraction of the sum due must be accepted, or that it can stop the raising of court proceedings.  This is consistent with the government guidance, which provides assistance on what the reasonable creditor is expected to do, for example, extend the repayment period;  change the type of repayment from interest plus capital to interest only;  or capitalise the arrears on the security.  The process must be carried out in a reasonable and unhurried manner, using “plain English”.   If a court action is raised, the guidance provides that the creditor must be in a position to establish that he has complied with the pre‑action requirements. 

[28]      Whatever else, the extensive correspondence between the respective solicitors, and indeed the whole background circumstances, demonstrate that there was never any prospect of the debtors being able to put forward a realistic or reasonable arrangement whereby their financial obligations could be fulfilled.  In these circumstances the various criticisms made of the position adopted by Swift in the course of that correspondence are of secondary, if any, importance to the question of compliance or otherwise with the pre‑action requirements in section 24A. 

[29]      In truth the correspondence taking place between October 2010 and mid-2012 reflected an attempt to reach a negotiated settlement of the claim for possession raised in the first sheriff court action.  It is somewhat artificial to view it through the lens of the pre‑action requirements.  Essentially Swift was presented with a “take it or leave it” offer that it be satisfied with whatever was left after Britannia had been paid for the proceeds of a sale at £350,000 – subsequently reduced to £300,000 – all in respect of a debt approaching £700,000.  Swift made it clear that this was not satisfactory, principally because it fell well below their valuation of the subjects.  However, if it could be shown that there were access problems which diminished the value of the security subjects, then Swift would be prepared to reconsider and instruct their own fresh valuation. 

[30]      Swift were not even met with a proposal to put the subjects on the open market.  Instead there was lengthy procrastination in respect of the requests set out in Mr Lang’s letter of 23 March 2011, and a dogmatic insistence upon acceptance of the Hendersons’ proposal.  In the course of the extensive negotiation between the solicitors for the parties, at no stage were Swift presented with a proposal which involved an alternative method of repayment of the defender’s debts in full – nor, in the circumstances, could there be such a proposal.  What was done far exceeded anything required to meet the needs of section 24A.  It follows that there was no bar to the raising of the current court proceedings. 

[31]      The above mirrors much of the reasoning of the sheriff on this topic.  In addition, the sheriff principal was well founded in his suggestion that the pre‑action requirements were aimed at a prevalent situation, far removed from the present case, where: 

“creditors proceeded rapidly on a debtor’s default to a calling up of the standard security and a raising of proceedings in court without any real communication with the debtor and little or no attempt to achieve some accommodation which might enable the debtor to continue in occupation of the security subjects on a mutually agreed basis with an adjusted payment regime.”

The sheriff principal was correct to conclude that, through their solicitors, both parties: 

“made reasonable efforts to reach an agreement … albeit they failed in those efforts, and that the pursuers as creditor therefore sufficiently complied with the pre‑action requirements set out in section 24A(3) of the 1970 Act”. 

He also correctly rejected a submission that the proposed private sale to the Hendersons was a reasonable step of the kind mentioned in section 24A(4).  Grounds of appeal 1 and 2 fall to be rejected. 

Ground of appeal 3
[32]      The final ground of appeal concerns section 24(5) of the 1970 Act (again introduced by the 2010 Act) which provides that decree cannot be granted unless it is reasonable in the circumstances of the case to do so.  Regard is to be had to the factors set out in section 24(7) of the Act.  The proposition for the debtors is that the focus ought to be on whether Swift could obtain a materially better price from the property than that available from the Hendersons’ proposal.  Neither the sheriff nor the sheriff principal dealt with this issue, and therefore they both erred in law.  It is submitted that the test of reasonableness is to be considered in the context of the wider purposes of the amendments introduced by the 2010 Act.  If there is no realistic prospect of a better price than that available from the Hendersons, it would be neither fair nor reasonable to allow Swift possession of the subjects and the power to sell them.  Swift called no valuation evidence at the proof to contradict the terms of the DM Hall reports.  It should therefore be assumed that the DM Hall valuations were accurate.  In any event, there was no evidence to the contrary.  The assertion by an employee of Swift that the property index showed a higher valuation is not a sufficient foundation.  There is no good reason to suppose that an open market sale will achieve a higher value. 

[33]      Mr Young suggested that an analogy can be drawn with the approach in England and Wales when dealing with applications by mortgagees under section 91(2) of the Law of Property Act 1925 to sell a property against the wishes of the mortgagor in cases of negative equity.  Reference was made to various decisions from south of the border, including Palk v Mortgage Services Funding plc [1993] Ch 330 at 337/41 and Cheltenham and Gloucester plc v Krausz [1997] 1 WLR 1558, both decisions of the Court of Appeal. 

[34]      It was submitted that the sheriff and the sheriff principal placed disproportionate weight on the amount of the arrears and the fact that the proposed sale would not clear them.  Reliance was also placed on the alleged unreasonableness of Swift’s position in the aforesaid correspondence.  The refusal of Swift to provide any support for its assertion that the DM Hall value was too low had unreasonably frustrated the Hendersons’ initiative.  Mr Young contended that there is no fair and rational basis for Swift’s desire to exercise its power of sale. 

[35]      For Swift, Mr O’Brien noted that, once again, the basic contention is that, instead of an open market sale, Swift should have accepted the Hendersons’ offer.  The reasonableness test is discretionary, and the usual principles on appeal apply (Accord Mortgages Limited v Cameron [2010] CSIH 31 paragraph 3).  Mr O’Brien noted that section 24(7)(b) requires the court to have regard to “the ability of the debtor to fulfil within a reasonable time the obligations under the standard security”.  The sheriff noted the arrears, the outstanding sums, and the inability of the defenders to meet their obligations.  The sheriff accepted evidence that Swift, after applying the Halifax Price Index, was of the view that the subjects’ value was significantly higher than that suggested by DM Hall, and that, in any event, the best price is usually obtained after marketing: finding 18.   

[36]      In these circumstances Mr O’Brien submitted that it would have been unreasonable to refuse to grant the orders sought.  Decree would allow Swift to test the market.  Section 25 of the 1970 Act obliges a heritable creditor to advertise a sale and take all reasonable steps to ensure that the subjects are sold at the best price.  The Act assumes that this involves marketing of the property.  This is in the best interests of both the debtor and the creditor. 

Mr O’Brien stressed that, in the whole circumstances, Swift was entitled to be sceptical, and to test the market.  Emphasis was placed upon finding in fact 18, which allowed the sheriff to conclude that there was a realistic possibility of a better price if the subjects were advertised in the usual way.  If they wished, the Hendersons could submit a bid. 

[37]      Mr O’Brien discussed the English cases and, in general, submitted that they provide no relevant or helpful guidance in the circumstances of the present case.  They were all decided upon their particular facts.  The Cheltenham & Gloucester case was perhaps the closest to the present on the facts. 

[38]      In the courts below, the sheriff noted that none of the factors specified in section 24(7) of the Act is of any assistance to the defenders.  The offer of £300,000 was unlikely to be acceptable to Swift, who valued the subjects at, at least, £500,000.  They were under a statutory obligation to obtain the best price, and were of the view that this was best achieved by a sale on the open market.  The proposed sale to the Hendersons would leave a substantial shortfall which the defenders could not address.  Like the sheriff, the sheriff principal was of the view that it would be reasonable for the court to grant the application. 

Decision on ground of appeal 3

[39]      On this aspect of the case, the submissions on behalf of Swift are well founded and are to be preferred.  There is no sufficient reason to interfere with the decisions in the courts below.  In the whole circumstances, including the pre‑action correspondence summarised earlier, it cannot be said that it would be unreasonable for the court to sanction possession of the subjects and their sale on the open market by Swift.  As discussed earlier in the context of the other grounds of appeal, the changes introduced by the 2010 Act were not designed to limit a creditor’s contractual entitlement to recover the full debt, nor to prevent steps designed to maximise the recovery.  The 2010 Act protected against unreasonable conduct adopted by a creditor in pursuing that objective. 

[40]      The circumstances here are that Swift was faced with an insistence that it should discharge the debtors’ obligations in return for a fraction of the indebtedness (the amount due to the first charge holder was never fully explored), all based on an offer which fell far below earlier expert valuations, and also Swift’s own valuation.  Nevertheless it remained willing to obtain a new valuation if it could be given clear evidence on the true state of the titles.  It is understandable that Swift lost patience and resumed the court proceedings.  The purpose was to allow Swift to test the market.  In the circumstances there was no burden on Swift to prove that a sale would achieve a higher price than the DM Hall valuation.   Mr O’Brien correctly observed that there are provisions in the Act reflective of the widely held view that an open market sale is likely to produce the best price.  All of this is supported by the sheriff’s findings-in-fact, not least finding 18, none of which were challenged. 

[41]      Contrary to the submission of Mr Young, there has been nothing untoward or unreasonable in the conduct of Swift.  Indeed, they showed remarkable patience and tolerance, even when faced with somewhat intemperate correspondence.  Had Mr Smith taken timeous and effective steps to recover the principal title deeds, it is possible that further litigation would have been unnecessary.  Given the very large gap between the valuations obtained by Swift and their view of the value of the subjects on the one hand, and the DM Hall valuations on the other hand, it would be wholly unreasonable to dismiss the action simply because expert evidence was not led by Swift at the proof. 

[42]      It might have been different if at any stage the debtors had offered to put the subjects on the market themselves.  Given the lengthy history, and the amount of the outstanding monthly payments and principal sum, it is clear that the lenders are now entitled to obtain possession of the subjects and seek to achieve the best possible price by advertising on the open market. 

[43]      For completeness, it should be recorded that the English decisions have not been overlooked.  They arose in a different jurisprudential and statutory context, and each case turned upon its own particular facts.  The circumstances of the Cheltenham and Gloucester case are remarkably similar to the present, and the court’s decision is of no assistance to the appellants.  On the contrary, the emphasis was on the mortgagee’s right to enter possession and exercise its rights in circumstances of negative equity, unless other funds were available to make good the shortfall. 

[44]      For the above reasons the appeal is refused, and the court adheres to the interlocutors in the courts below.