RIGHTS IN SECURITY

Suppose that a debtor owes money to a creditor. The creditor has a personal right against the debtor, which he can use to recover the debt through legal proceedings. However, this may not be enough to ensure recovery of the debt.

A real right in security is a right in an item of the debtor’s property given to the creditor to secure payment of the debt. It may give the creditor the right to sell the property in order to pay off the debt. As Justinian observes (J.3.14.4), a right in security:

“benefits both parties, the debtor because it helps him get credit, and the creditor because it helps him give credit safely.”

Justinian is speaking here specifically about the right in security called pledge (see below), but the same is true for any security right.

A right in security is a right accessory to the debt. What this means is that the security right is dependent for its existence on the existence of the debt, but the debt is not dependent for its existence on the right in security. Thus, if the debt is paid off, the right in security is also extinguished. On the other hand, if the right in security is lost for some reason, that does not affect the debtor’s obligation to pay the debt.

Pledge (pignus)

Pledge was a right in security over corporeal property, constituted by delivery of the property by the pledgor (debtor) to the pledgee (creditor). For the re­quirements of delivery, see Chapter 5. The right of pledge was dependent on continued possession by the creditor. Accordingly, if possession was lost for any reason, the creditor’s real right would be lost, although, as mentioned, the debt would continue to be payable.

Rights and obligations of the pledgee

The creditor, having possession of the debtor’s property, was under an obligation to take care of the property, as Justinian says, to “the highest standard of care” (J.3.14.4). He would therefore be liable to the debtor for any damage caused to the property due to failure to meet this standard of care. The creditor would not, however, be liable for any damage occurring without any fault at all on his part.

Originally, pledge gave the creditor no right to sell the property, only the right to retain it. However, it became common practice to contract for an express power of sale, to the extent that in the classical period a power of sale was taken to be implied unless expressly contracted out of.

Other rights in security

Various other forms of security were recognised. Not all of these were real rights in security in the strict sense described above, in that not all gave the creditor a ius in re aliena.

Fiducia

This was the original form of security. It involved a formal conveyance of the property to the creditor, subject to an obligation to reconvey on repayment. Fiducia therefore gave the creditor ownership rather than a ius in re aliena. This made the debtor vulnerable to the creditor transferring the property to a third party.

Hypotheca

This evolved from pledge, and was a right in security which allowed the debtor to retain possession. It therefore gave the advantage to the debtor that he was not deprived of the use of the property. However, in the absence of a system of public registration of security rights (as is found in most modern systems), the creditor was subject to the disadvantage that he could not be sure whether a previous hypotheca had been created over the property. This might have the effect of making the security worthless, because those creditors with securities created earlier would be paid first. If the value of the property was insufficient to pay off all secured creditors, those with securities created later might recover little or nothing.

Personal security

It was also possible for the creditor to secure his position, not by acquiring a real right in something belonging to the debtor, but by a third party guaran­teeing payment of the debt. This was done by means of a form of stipulatio (see Chapter 7) known as adpromissio. The third party would undertake to pay off the debt if the debtor failed to pay. In other words, the third party acted as a guarantor of the debt or, in modern Scots terminology, a cautioner.

Essential Facts

• Property law is part of the second division in the Institutional Scheme. Property rights can be divided into real rights and personal rights. A real right is a right in an item of property, and can be enforced against anyone interfering with that property. A personal right is enforceable only against a particular person or persons. Real rights are part of the law of property in the narrower sense, whereas personal rights are the province of the law of obligations. Only a limited number of real rights were recognised.

• The main real right was ownership, which was the ultimate power of using and disposing of a thing. In principle, there could be only one right of ownership in an item of property. However, a person who had taken, by an inappropriate method of conveyance, property falling into the category known as res mancipi was given some of the rights of an owner, and was known as a “bonitary owner”.

• A person in possession of property, even without a right to possess, was entitled to remain in possession until the question of right was resolved. The real right of possession was lost if the possessor was dis­possessed, but if this happened the dispossessed party had a personal right against the dispossessor for the property’s return. If in good faith (i.e. if he believed he had a right to the property), the possessor had also several other rights, particularly the right to retain the fruits of the property as long as good faith lasted.

• Praedial servitudes were rights held by the owner of one area of land (the dominant land) to make some specified use of a neighbour’s land (the servient land) or to restrict in some way the neighbour’s use of his land. Because the servitude was a real right, it bound any subsequent owner of the servient land. The benefit of the servitude also passed to any subsequent owner of the dominant land.

• Usufruct was the most important of the class of real rights known as personal servitudes. This entitled the holder the use and enjoyment ofproperty, usually for life. The usufructuary was entitled to the fruits of the property, but could not diminish its substance, for example by demolishing buildings.

• A right in security was a right subsidiary to an obligation, with the purpose of securing payment of the obligation. The main real rights in security were pledge, which involved the creditor having possession of an item of the debtor’s property, and hypotheca, which did not.

Essential Cases

Burnett’s Trustee v Grainger 2004 SC (HL) 19: Mrs Burnett entered into a contract to sell a house to the Graingers, who paid the purchase price. However, before the real right of ownership could be transferred to the Graingers, Mrs Burnett’s estates were seques­trated (i.e. she was declared bankrupt). Her property was transferred to a trustee, who took title to the house. The court held that, as the Graingers had only a personal right at this time, they could not enforce this right against the trustee. The trustee was accordingly entitled to the house.

Stronach’s Executors v Robertson 2002 SC 540: Mr Robertson held a liferent (the Scots equivalent of a usufruct) over a house, which, it was alleged, he had allowed to fall into disrepair. The owners sought to compel him to make repairs. With reference to Roman authority, Mr Robertson successfully argued that he could not be compelled to make repairs, but only to provide security for the damage.

Moncrieff v Jamieson 2008 SC (HL) 1 : in this case, the question was discussed whether it was possible to have a servitude right allowing the parking of a car on the servient land. It was accepted that this was competent. Roman authority was discussed in the House of Lords in support of this proposition.

Compugraphics International Ltd v Nikolic 2011 SLT 955: in this case, Roman authority was used to justify the recognition of a new form of servitude, allowing pipework attached to a building to overhang neighbouring land.

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