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Creation and priority of mortgages

The legal charge (also known as a charge by way of legal mortgage) is now the only effective way of mortgaging land.

Formalities

A legal mortgage must be created by deed (Law of Property Act 1925, s 52). In the case of freeholds or leases for more than seven years, the creation of a protected first legal mortgage triggers compulsory first registration of title (Land Registration Act 2002, s 4(1)(g)).

Consumer protection

The Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 will generally apply to a mortgage by an individual homeowner to secure a loan made by a lending institution. Under these, any written term of the mortgage contract must be expressed in plain, intelligible language. If there is any doubt, the interpretation most favourable to the consumer will prevail. Some types of interest provisions have been held to be unfair, and so not binding on the borrower. For example, a provision allowing for the higher rate of interest to apply even after the arrears were discharged (Falco Finance v Gough [1999] 17 Tr LR 526).

A typical Bank or Building Society loan secured by a first legal charge will probably be an exempt agreement for the purposes of the Consumer Credit Act 1974. This is unlikely to be the case with second mortgages, particularly if they are by a different lender, as the amended Consumer Credit (Exempt Agreements) Order 1989, SI 1989/869 allows for an exemption only where the money is used for specified purposes.

The Consumer Credit Act 2006 removed the financial limit (previously £25,000) for consumer credit agreements.

Registration

Existing legal mortgages of unregistered land protected by deposit of deeds do not need to be registered. Those not protected by deposit ('puisne' mortgages) need to be registered under the Land Charges Act 1972.

A mortgage of an equitable interest (eg an agreement for lease) is necessarily equitable. It is no longer possible to create an equitable mortgage by deposit of deeds alone (the combined effect of United Bank of Kuwait v Sahib [1996] 3 All ER 215 and Law of Property (Miscellaneous Provisions) Act 1989, s 2).

Charges of land created by companies must be registered within 21 days under Companies Act 2006, s 860. Registration must be effected using form MG01. Applications submitted using the old form M395 will be rejected by Companies House.

The requirement for overseas companies to register charges with the registrar of companies does not apply to charges created on or after 1 October 2011 over property of the company situated in the UK.

On 8 December 2010, the government published its response to the consultation by the Department for Business Innovation and Skills (BIS) on the Companies House regime for the registration of charges created by companies and limited liability partnerships (LLPs). The government has proposed a number of important changes to the registration scheme. The previous scheme had been criticised for being burdensome, inconsistent and uncertain. Companies Act 2006 provides power to revise the scheme. In light of the comments received through the consultation process, the government intends to revise the scheme so that there is a single UK-wide scheme that applies to all companies incorporated under Companies Act 2006 or its predecessors. The changed scheme will also apply to unregistered companies and limited liability partnerships. It will not apply to overseas companies. In April 2011 BIS issued a document setting out issues to be resolved before legislative changes could be effected. In August 2011 BIS issued a revised scheme, proposing revision of Part 25, Companies Act 2006. The revisions provide for a single scheme applicable regardless of either location of the charged assets or the law used to create the charge. The intention is to publish draft regulations in early 2012, with the amendments to Part 25 to come into force on 1 October 2012.

Department for Business Innovation and Skills, Government Response

Department for Business Innovation and Skills, Revised scheme for registration of charges created by companies and limited liability partnerships

Priority

The priority of registered charges is governed by the order in which they are shown on the register. This can be altered by agreement among the mortgagees, usually by means of a Deed of Priorities, or Postponement. These must themselves be registered.

The proprietor of a registered charge may make a further advance on the security of it ranking in priority to a subsequent charge if:

  • the advance is made pursuant to an obligation, or

  • the parties have agreed a maximum amount for which the charge is security

  • and at the time of the creation of the subsequent charge that obligation, or the agreement, was entered in the register: see Land Registry Practice Guide 29 for the use of forms CH2 and CH3 and generally.

    The Land Registry will note an obligation to make further advances only if it is contained in:

  • form CH1

  • an approved form of charge, or

  • a separate application in form CH2

  • If no note of the obligation appears on the register, priority for a further advance may be lost to a subsequent lender.

    An application may be made to note on the register an agreement for the maximum amount secured by a charge. This gives the lender priority over any later registered charges for the original loan and any further advances up to the maximum sum specified. Even if an amount is stated in the charge, irrespective of whether the charge has previously been approved, or in a subsequent deed of variation, application to note the maximum amount must always be made in form CH3.

    The Registry no longer serves notice on earlier mortgagees when a subsequent charge is registered. This is now the responsibility of the later mortgagee.

    Under the Land Registration Act 2002, the priority of any further advances will be determined by the date on which the later mortgagee's notice is deemed to have been received, as set out in Land Registration Rules 2003, SI 2003/1417, r 107.

    A chargee, when exercising its power of sale, is now under a duty to consult the register before disposing of surplus proceeds. The mortgagee is to be taken as having had notice of any entries on the register immediately before the sale.

    Registering a restriction does not mean that a chargee can block all subsequent entries on the title. Restrictions have to be worded according to a standard 'menu'. The mortgagee restriction (form P) prevents registration of a 'disposition' without the mortgagee's consent. However, the Registry does not permit restrictions worded in wider terms, which try to prevent anything being put on the register without the mortgagee's consent.

    Discharge

    Fixed rate mortgages will normally include penalties for repayment before the fixed rate period expires (and often after this).

    Many mortgages will include a right for the mortgagee to consolidate - that is to decline redemption of one mortgage unless all mortgages by the same mortgagor are also discharged. Apart from this, it will always be important to determine whether a borrower has more than one mortgage account, particularly when giving an undertaking to redeem a mortgage on completion.

    Land Registry Practice Guide 31 deals with the registered land procedure.

    Where it appears from a receipt endorsed on a mortgage of unregistered land that money has been paid by a person who is not entitled to the immediate equity of redemption, the receipt operates as if the benefit of the mortgage had by deed been transferred to him (Law of Property Act 1925, s 115(2)).

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