MORTGAGES
OF LAND
An
article by
GREGORY
TAYLOR
This
article is intended only as a brief general outline of the
method of creating mortgages over land situated in
England and Wales.
The law and procedures mentioned here relate only to those
of
England and Wales.
In this article, the words
land and
property mean any
type of land and real estate/property, including any
buildings on the land or property, and whether freehold
and/or leasehold.
The word
mortgage is
generally used to refer to a secured loan from an
institutional lender (a bank, building society etc.) and
taken out by a borrower in order to buy a property, but the
same principles and procedures apply generally to secured
loans from any type of lender (an institutional lender, a
company or an individual) and taken out by a borrower on
any property which the borrower is buying or already owns.
The correct legal expression, which applies to all these
various types of secured loan, is
[legal] charge, and
the expression
charge will be
used in this article.
NATURE
OF A CHARGE
A charge is a type of burden or liability registered
against a property in order (usually) to secure a loan of
money by the owner of the property [the borrower] to
another person [the lender]. The borrower remains the owner
of the property itself, but is only free to deal with the
property - by way of sale, transfer or other transaction -
once the rights of the lender have been fully satisfied
(usually, only once the lender has been repaid in full).
The lender has certain rights in the event of the
borrower’s failing to comply with the terms of the
charge ; in particular, the lender has a right to sell the
property to recover any outstanding monies, subject to the
terms of the charge document and to various legal rules.
CREATION
OF A CHARGE
A charge can only be created by
deed expressed to be by way of legal mortgage
[s. 85
Law of Property Act 1925]. A deed is a type of formal
signed ["executed"] document which developed historically
out of the common law, and a deed must be used, among other
things, for charges and transfers of land. A deed must make
clear, on its face, that it is intended to be a deed [s.
1(2)(a) Law of Property (Miscellaneous Provisions) Act
1989]. In the case of an individual, a deed must be signed
in the presence of an independent witness, who must also
sign and provide his/her name and address (and usually,
occupation). For execution of deeds by
companies, please
click
HERE for
the article
Company contracts and documents
; please also refer to the section on
Company charges below.
TERMS
OF CHARGE
The borrower and the lender are generally free to agree the
specific conditions of the loan secured by the charge
and/or the circumstances in which the lender can enforce
the charge in order to recover the outstanding monies. Such
terms typically include : the capital sum borrowed ; the
length of the loan period ; the interest rate payable etc..
Most charges are created in favour of institutional
lenders, such as banks and building societies, with their
general standard conditions for loans, but with specific
terms for the particular borrower and property. The
majority of these institutional lenders are members of
the
Council of Mortgage Lenders - please
click
HERE for
the CML’s website.
FORM
OF CHARGE
As a charge can only be created by deed, it must be in
writing. Institutional lenders always have their own
standard form of "Mortgage Deed" or "Legal Charge" document
- please click
HERE for
an example of a standard form of charge document
for
Nationwide Building Society [PDF].
Provided that it complies with the Land Registry’s
general requirements for a charge, the parties are free to
use their own form of charge document. As a (safer)
alternative, especially where both the borrower and the
lender are private individuals, the parties should use
the
Land Registry’s form CH1 - to
download a copy of
form CH1 [as a
PDF], please click
HERE
Whichever type of charge document is used, it must actually
state that the borrower
charges the
property
by way of legal mortgage [as
security for the payment of the borrowed monies and to
secure all the borrower's other obligations to the lender -
as an example, please see Panel 7 in the Land
Registry
form CH1].
REGISTRATION
OF CHARGE
To be effective as security, charges of land must be
registered at the
relevant
Land Registry. This
applies whether or not the property itself is registered at
the Land Registry at the time the charge is created - if
the property is unregistered land (this is now increasingly
rare in the urban areas), the creation of the charge will
bring about the requirement to register the property itself
for the first time at the Land Registry.
If the charge is created at the same time as the transfer
of the property to the borrower (that is to say, on the
buyer’s purchase of the property), then the transfer
and charge will be registered at the Land Registry at the
same time - the borrower’s name and details will be
inserted in the Proprietorship Register of the registered
title, and the lender’s name and details in the
Charges Register.
If the charge is created because the borrower is
re-mortgaging the
property (that is to say, paying off the original loan and
taking out a new loan, usually from another lender), then
the borrower’s name and details will remain in the
Proprietorship Register of the registered title, and the
new lender’s name and details will replace those of
the previous lender in the Charges Register.
If the charge is created because the borrower is taking out
a
second or further loan to be
secured on the property (that is to say, the borrower is
not repaying the original loan, and is taking out a further
loan, usually from another lender), then the
borrower’s name and details will remain in the
Proprietorship Register of the registered title, and the
new lender’s name and details will be placed below
those of the existing lender(s) in the Charges Register.
Usually, the existing lender(s) must give consent to any
later secured loan(s), and unless otherwise arranged and
stated in the Charges Register, the lenders will
have
priority as
between themselves in the order in which the charges in
their favour appear in the Charges Register. This means,
for example, that the lender under a first charge will have
to be repaid in full, before the lender under a second
charge receives any money at all, and the same principle of
priority applies as between the lenders under a second and
any third charge, and so on.
Please click
HERE for
the
Land Registry website.
Please click
HERE for
an example of a Land Registry
title register and
title plan [PDF].
COMPANY
CHARGES
Special additional rules also apply where the borrower is a
company. All UK-registered companies (and certain foreign
companies) must,
within 21 days after
the date of the charge’s creation,
first deliver
to
Companies House [the
UK’s registry of companies] in
Form MG01 [which
replaced the previous Form 395 on 1st October 2009] the
prescribed particulars of the charge, as well as the
original charge document itself [s. 860 ff. Companies Act
2006],
and this must be done
before the
charge document is sent for registration at the Land
Registry. Failure to register the charge with Companies
House within these 21 days [or within the very limited
extra time set out in s. 870 Companies Act 2006 for charges
created outside the United Kingdom], has extremely serious
consequences indeed : the security conferred by the charge
will be
void against
the liquidator or administrator and any creditor of the
company, that is to say, it will, in effect, be an
unsecured
loan ! [see
s. 874 Companies Act
2006]
For the
Companies House website,
please click
HERE
To download a copy of
Form MG01 [PDF],
please click
HERE
As
indicated at the beginning of this article, this is only
intended as a brief general outline of the relevant law and
practice, and expert legal advice must first be taken, if
involvement in any mortgage, charge or other arrangement is
intended.
CLICK
HERE
FOR LIST OF MEMBERS OF "NEW"