Ad Factum Praestandum. What is it?

Author: Mitchells Roberton
Posted on:

Ad factum praestandum in Scots law is an obligation for the performance or fulfilment of a specific act. It does not apply to the payment of money.

Most people are familiar with lenders securing a loan or mortgage by way of a standard security whether from purchasing their own home or obtaining commercial funding for their business. The standard security is then registered in the Land Register and if the borrower defaults on the loan then the lender has powers under the security to sell the property and use the proceeds to pay off the loan.

However, a standard security can also be used to secure another obligation to do something specific (known as securing an obligation ad factum praestandum e.g. to implement obligations by a landowner in an option contract). The form of such a standard security is a bit different to that of a mortgage type of security but it does the same thing. It is registered in the Land Register against the title to the property and will show up in searches of the Register carried out by anyone who might want to buy or take a lease of the property or take another security over it.

But the law on this topic is complicated and a bit out of date. The key legislation governing this area of law is The Conveyancing and Feudal Reform (Scotland) Act 1970 but the various provisions of the Act proceed on the assumption that the debt is a monetary one.  The Scottish Law Commission is therefore reviewing the position of heritable securities at the moment. In their first discussion paper The Commission states “the effect of using a standard security to secure a non-monetary obligation  ….such as an option to buy land if planning permission is granted, is unclear”.

There is a recent case which reflects this lack of clarity, JH & W Lamont of Heathfield Farm V Chattisham Ltd. In this case,Lamont the owners of 73 acres of land with development potential entered into a contract with a developer whereby the developer in exchange for payment of £135,000 acquired an option to buy the land. As security for implementation of the owner’s obligation, a standard security was granted to the developer.

The planning permission was never granted and the option agreement came to an end whereupon the owners, Lamont, asked for the developer to discharge the security which the developer refused to do on the basis that the owners were in breach of contract and the developer claimed 35 million pounds of damages for the alleged breach based on the amount of profit the developer would have made if the development had gone ahead. Lady Woolfe held that the standard security should be discharged and upon appeal to the Inner House of the Court of Session her decision was upheld.

Professors Gretton and Reid disagreed with this decision however, as they thought that the 1970 Act provided that an ad praestandum standard security is a security for the damage element also.

A Standard Security is rarely a solution or remedy for all difficulties. If the seller became insolvent the security holder could call up the security but this would not make the security holder the owner.  The security could, however, be used to seek specific implementation of an obligation i.e. require the granter to do what the contract obliges him to do or seek monetary compensation for loss but there can be problems regarding quantification of loss.

All of that said, the best chance of securing a non monetary obligation is still by granting a standard security but if an ad praestandum security is being entered into it is very important that it has been drafted properly  and expressly covers the payment of damages arising from a breach of that non monetary obligation as well as the obligation itself.

If I can assist please contact me Ross Leatham on 0141 552 3433 or by email rjl@mitchells-roberton.co.uk

Comments are closed.

Tags:

Share