Learning Outcomes
By the end of this article, you will be able to identify and explain the main types of mortgages and charges affecting land, distinguish between legal and equitable mortgages, understand the rules of priority between competing charges, and apply the correct procedures for investigating and reporting on mortgages and charges in both registered and unregistered land. You will also be able to advise on the practical implications of existing charges for buyers, sellers, and lenders in property transactions.
SQE1 Syllabus
For SQE1, you are required to understand the legal framework and practical implications of mortgages and charges in property transactions. Focus your revision on:
- The distinction between legal and equitable mortgages and how each is created.
- The process for investigating title to identify existing mortgages and charges in both registered and unregistered land.
- The rules of priority between multiple mortgages and charges, including the effect of registration.
- The procedures for discharge and redemption of mortgages on completion.
- The impact of floating charges and company security interests on property transactions.
- Advising clients on the risks and consequences of existing charges.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the key difference between a legal mortgage and an equitable mortgage?
- In registered land, how is the priority of mortgages determined?
- What steps should a buyer’s solicitor take if a charge is revealed on the charges register of a registered title?
- True or false? A floating charge always takes priority over a fixed legal mortgage.
Introduction
Mortgages and charges are central to property law and practice. They create security interests over land, affecting both ownership and the ability to transfer property. For SQE1, you must be able to identify, investigate, and advise on mortgages and charges in both registered and unregistered land, and understand how priority between competing interests is established.
Mortgages and Charges: Legal Framework
A mortgage is a security interest in land, usually to secure repayment of a loan. A charge is a broader term for any security interest over property, including mortgages.
Key Term: legal mortgage
A mortgage created by deed that complies with statutory requirements, giving the lender (mortgagee) a legal interest in the land and statutory remedies.Key Term: equitable mortgage
A mortgage that does not comply with the formalities for a legal mortgage but is recognised in equity, often arising from a written agreement or deposit of title deeds.
Creation of Mortgages
A legal mortgage must be created by deed and, for registered land, must be registered at HM Land Registry to take effect as a legal charge. In unregistered land, a legal mortgage is created by deed and may trigger first registration.
An equitable mortgage may arise where the parties intend to create a mortgage but do not comply with the formalities for a legal mortgage, or where the mortgagor only has an equitable interest in the land.
Charges by Companies
Companies may create both fixed and floating charges over their assets. Fixed charges attach to specific property. Floating charges cover a class of assets that may change over time and "crystallise" into a fixed charge on default or another specified event.
Key Term: floating charge
A security interest over a class of assets (such as stock or receivables) that allows the company to deal with those assets until the charge "crystallises" and becomes fixed.
Investigation of Title: Mortgages and Charges
When acting for a buyer or lender, you must investigate title to identify any existing mortgages or charges. The process differs between registered and unregistered land.
Registered Land
In registered land, the charges register will show all registered mortgages and other charges affecting the title. The register will also show the name of the lender and the date of the charge.
Key Term: charges register
The section of the registered title at HM Land Registry listing all registered mortgages, charges, and other encumbrances affecting the land.
If a mortgage or charge is revealed, the buyer’s solicitor must ensure that it will be discharged on or before completion. This is usually achieved by obtaining an undertaking from the seller’s solicitor to redeem the charge and provide evidence of discharge (such as a DS1 or confirmation of electronic discharge).
Unregistered Land
In unregistered land, mortgages are revealed by examining the title deeds and the epitome of title. A legal mortgage will appear as a deed in the chain of title. Equitable charges may be protected by registration as a land charge at the Land Charges Department.
Key Term: epitome of title
A chronological bundle of documents evidencing ownership and all relevant interests in unregistered land, including mortgages and charges.Key Term: land charges search
A search at the Land Charges Department in Plymouth to reveal registered land charges (such as equitable mortgages, restrictive covenants, or other encumbrances) affecting unregistered land.
Priority of Mortgages and Charges
When more than one mortgage or charge exists over the same property, the order in which they are paid out of the proceeds of sale is determined by rules of priority.
Key Term: priority of charges
The order in which multiple mortgages or charges are satisfied from the proceeds of sale, determined by the date of creation and/or registration.
Priority in Registered Land
In registered land, priority is determined by the order of registration at HM Land Registry. A later charge registered before an earlier one may take priority. Some interests, such as those of persons in actual occupation, may override registered charges.
Priority in Unregistered Land
In unregistered land, legal mortgages take priority by the date of creation. Equitable mortgages and other charges protected by registration as a land charge take priority by the date of registration. Failure to register an equitable charge may result in loss of priority.
Company Charges
For company charges, registration at Companies House within 21 days is essential. Failure to register a charge at Companies House may render it void against a liquidator or other creditors.
Discharge and Redemption of Mortgages
On completion, any existing mortgages or charges must be discharged so that the buyer takes the property free of them. In registered land, this is evidenced by a DS1 (discharge of whole) or confirmation of electronic discharge. In unregistered land, a receipted mortgage deed or deed of release is required.
Key Term: redemption
The process by which a borrower repays the mortgage loan and the lender releases its security over the property.Key Term: discharge of mortgage
The formal process of removing a mortgage or charge from the title, evidenced by a DS1 (registered land) or a receipted mortgage deed (unregistered land).
Floating Charges and Commercial Transactions
Floating charges are common in commercial property transactions involving companies. They allow the company to deal with the charged assets until crystallisation. On sale, the buyer’s solicitor must check whether the floating charge has crystallised and obtain a certificate of non-crystallisation or a release from the lender.
Remedies of the Mortgagee
If the borrower defaults, the lender may exercise statutory remedies, including:
- Power of sale (usually under s 101 Law of Property Act 1925)
- Taking possession
- Appointment of a receiver
- Foreclosure (rare in practice)
The proceeds of sale are applied in order of priority to pay off the charges.
Priority Disputes and Risks
If a charge is not properly registered, or if a floating charge crystallises before completion, a buyer may take subject to the charge. Failure to obtain proper undertakings or evidence of discharge can result in the buyer being bound by an existing mortgage.
Worked Example 1.1
A buyer’s solicitor discovers two charges on the charges register: a first legal mortgage to Bank A and a second legal mortgage to Bank B. What steps should the solicitor take before completion?
Answer: The solicitor must obtain an undertaking from the seller’s solicitor to redeem both mortgages on or before completion and provide evidence of discharge (DS1 or electronic confirmation) for each. The solicitor should ensure that the purchase money is sufficient to redeem both mortgages. If the undertakings cannot be given, the buyer should not complete.
Worked Example 1.2
A company is selling a warehouse. The buyer’s solicitor discovers a floating charge registered at Companies House. What must the solicitor do?
Answer: The solicitor must check whether the floating charge has crystallised. If not, obtain a certificate of non-crystallisation from the lender. If the charge has crystallised, a formal release or deed of discharge must be obtained before completion.
Exam Warning
In registered land, priority is determined by the order of registration, not the date of creation. Do not assume an earlier charge always has priority if it was registered later.
Revision Tip
Always check both the charges register (registered land) and the land charges search (unregistered land) for existing mortgages or charges. Never assume a title is free of encumbrances without documentary evidence.
Key Point Checklist
This article has covered the following key knowledge points:
- A legal mortgage is created by deed and must be registered to take effect as a legal charge.
- An equitable mortgage arises where formalities for a legal mortgage are not met but the parties intend to create security.
- In registered land, the charges register reveals all registered mortgages and charges; in unregistered land, mortgages are found in the epitome of title and by land charges search.
- Priority of charges in registered land is determined by order of registration; in unregistered land, by date of creation or registration.
- Company charges must be registered at Companies House within 21 days or risk being void.
- On completion, all existing mortgages and charges must be discharged, with evidence provided to the buyer.
- Floating charges require special attention—check for crystallisation and obtain necessary releases.
- Failure to investigate and discharge existing charges can leave a buyer bound by them.
Key Terms and Concepts
- legal mortgage
- equitable mortgage
- floating charge
- charges register
- epitome of title
- land charges search
- priority of charges
- redemption
- discharge of mortgage
