The Bankruptcy and Diligence etc (Scotland) Act 2007 Land Attachments - the implications for the banking and financial sector


The Bankruptcy and Diligence etc (Scotland) Act 2007

Land Attachments - the implications for the banking and financial sector

Contact - Derek Arnott, Consultant

In this and in previous Banking Bulletins we have explained how large parts of the Act will impact on the banking sector. As a result, an understanding of how the overall Bankruptcy and Diligence regime will work will be crucially important for banks operating in Scotland.

One aspect of the new regime is the introduction of Land Attachments as a new form of diligence and how this may entail some new thinking when financing property related transactions.

As some readers may be aware, the old and rarely used diligence of adjudication for debt has been abolished and replaced by two new forms of diligence known as Land Attachment and Residual Attachment. This note relates only to the special complications associated with Land Attachments.

Before a Land Attachment can be obtained the debt must be proved and it is not a diligence which can be used on the dependence of an action. A creditor holding a Land Attachment can apply to the court to sell the attached land after the lapse of six months, provided a debt of at least £3,000 remains unpaid. The sale process is a rather formal one involving an officer of the court, likely to be a solicitor, being named as an appointed person to deal with the sale. Despite the formalities it is widely anticipated that Land Attachment will be used extensively in the future.

While it is difficult to compile a definitive list of all the circumstances in which lenders will need to deal with Land Attachments we have identified some of the more likely situations:-

- Debt Recovery - Land Attachments are likely to be heavily used by lenders in their own debt recovery actions as they may offer an attractive alternative to full insolvency proceedings. Where the debtor owns heritable property, even if there is only limited equity available, it may prove beneficial to take out a Land Attachment. This may well be a useful tool even if there is no intention to force an immediate sale. The Land Attachment can be left in place for five years (and then renewed) during which time the increase in value of the property may justify a sale.

- Banks will need to be very careful when they receive notice of a Land Attachment affecting property over which they hold a standard security. Creditors who obtain Land Attachments will require to intimate this to the holders of any prior security such as a bank or building society. The effect on the preference in ranking will be similar to the intimation of a second charge on the property necessitating the holder of the first charge stopping operations on secured accounts. The priority in ranking enjoyed by the holder of any existing standard security will be limited to debts at the date of intimation along with any advances which the first charge holder is committed to making. The holder of the existing charges will, of course, still enjoy priority of ranking in respect of interest and charges arising on the existing debt.

- When a lender becomes aware that diligence has been used against a customer it is often appropriate to review the facility documentation to decide whether or not this amounts to an event of default. Generally, lenders will want to be in a position to treat the use of diligence as an event of default but it is possible that the wording used in older forms of facility documentation may be too restrictive. For example do any of your facility letters have default provisions which do not use wording wide enough to catch the new forms of diligence as events of default? If so it may be time to review the wording of standard facility documentation.

- Bridging transactions - Where there is a disparity between the dates for the sales and purchases of property the successful completion of the sale or purchase often depends on banks being willing to lend on the strength of concluded missives. In many such instances the financing is not secured by a standard security and relies only on a 'mandate' granted by a seller authorising his solicitor to pay the free proceeds of a sale to the Bank to repay the bridging advance. Such mandates traditionally took the form of assignations in security. Over the years there have been disputes over the respective priorities enjoyed by creditors holding mandates and arresting or inhibiting creditors the outcome of which has resulted in general acceptance of current practices. The position with Land Attachments is, however, much less clear and documentation and practices used for bridging transactions requires careful consideration. In particular there will, in our view, be a need to ensure that up-to-date searches are available to ensure that there are no Land Attachments in existence before lending.

- Purchasers of heritable property, and those who finance the purchases, may also face some risks where they are relying on missives rather than a recorded disposition. An example might be where the purchase is being made subject to planning consent being obtained for a particular type of development. In such cases it is usual to have a suspensive condition in missives which would stipulate that the deal will be finalised as soon as planning consent comes through. Purchasers in such cases might well be advised to lodge a caveat under section 91 of the Act which is designed to give them some protection from a situation where a creditor of the seller obtains Land Attachment in the period before the title is formally transferred to the purchaser.

The new regime involves a new approach to this an many other topics and the key message is not to rely on old procedures where the underlying principles have created a changed risk scenario.