This Statement provides a guide to the types of security that individuals can give over real estate and the formalities required.
Mortgages/charges over real estate
People can give mortgages or charges over their real estate (ie interests in land and buildings). Whilst there is a historic difference and an academic debate, there is no real difference anymore between the terms 'mortgage' and 'charge' and the terms are used interchangeably in some Court judgments.
Legal mortgages/charges
A 'legal' charge or mortgage is one that is registered over the legal title to the property. It must be given by deed and registered against the title to the property. If the charge supports a loan for less than certain limits, there may be further Consumer Credit Act 1974 formalities.
Once registered, a legal charge acquires priority over later charges (the date of registration being paramount). It is also possible (and sensible) for the legal charge holder to place a restriction on the Land Registry title so that no amendment can be made to the title without their consent. This is because, if a second charge is registered, the first charge only takes priority up to the amount secured at the time the second charge is registered.
The holder of a legal charge will have the ability to appoint a receiver over the property pursuant to the Law of Property Act 1925 and the terms of the charge. Whilst any legal charge holder can appoint a receiver, the receiver appointed by the chargee with greatest priority takes precedence.
Equitable mortgages/charges
In England it is possible to have different 'legal' and 'equitable' titles to property. The 'legal' title is held simply by whoever is named on the title deeds or at the Land Registry. The 'equitable' title is held by the person or people entitled to the proceeds of the property.
So if, for instance, a husband and wife hold the legal title on trust for their children, the equitable title will be held by the children. Or, if the legal title is held solely by a husband, but his wife contributed to the purchase price, the Court may determine that the husband holds the legal title, but that he holds it on trust for him and his wife, who both hold the equitable title.
An equitable charge or mortgage arises when:
- a charge is created over only the equitable interest of an owner of the equitable title, or
- a 'legal' charge has been created that has not been registered against the title (and the holder of the charge could force the person who gave it to register it).
Priorities of equitable charges depend upon 'notice', and therefore whether any subsequent equitable charge holder was aware of the first charge. This is because a bona fide purchaser for value without notice can trump an earlier equitable interest. As such, equitable charges are usually registered against the legal title as restrictions or unilateral notices so that an argument can be raised that any subsequent chargee had notice.
The only formality is that the person creating the equitable charge must sign it. It used to be possible to create an equitable charge by simply depositing title deeds with the lender, but given the implementation of the signature rule on 27 September 1989, that is now not possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.