Investigation of title - Mortgages and charges

Learning Outcomes

This article examines mortgages and charges in property transactions, focusing on legal and equitable security interests; the creation, protection, investigation, and discharge of security in registered and unregistered land; and differences in formalities, notice requirements, and documentary evidence depending on title type. It discusses priority rules and statutory registration requirements and their implications for buyers, lenders, and sellers; company fixed and floating charges and the consequences of failure to register; risk identification and proactive measures to protect or investigate interests; the significance of undertakings, redemption procedures, and evidential documents (such as DS1 and receipted deeds); the impact of existing charges on marketability; interpretation of register entries; and the remedies available to mortgagees.

SQE1 Syllabus

For SQE1, you are required to understand mortgages and charges in property transactions and how to investigate title where such security interests exist, with a focus on the following syllabus points:

• The distinction between legal and equitable mortgages and the requirements for their valid creation.
• Procedures for investigating title in both registered and unregistered land, with a focus on the identification and assessment of mortgages and charges.
• The registration and effect of legal and equitable charges, including company security interests and floating charges.
• The rules determining the priority between charges, such as the order of registration and the consequences of failure to protect security.
• The process for discharging and redeeming mortgages on completion, evidential requirements, and the consequences for buyers and lenders if not properly executed.
• The investigation of company security, including registration at Companies House and the effects of crystallisation of floating charges.
• The risks and liabilities connected with existing charges, including potential conflicts of interest, the impact on completion, and the remedies available to mortgagees.

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.

1. What is the key difference between a legal mortgage and an equitable mortgage?
2. In registered land, how is the priority of mortgages determined?
3. What steps should a buyer’s solicitor take if a charge is revealed on the charges register of a registered title?
4. True or false? A floating charge always takes priority over a fixed legal mortgage.

Introduction

Mortgages and charges are a central aspect of English property law, forming the basis of both private and commercial real estate transactions. These security interests not only facilitate access to financing but also bear upon the value, marketability, and transferability of land. For property practitioners, the ability to identify and consider existing mortgages and charges when investigating title is necessary. Such interests affect not just owners but also purchasers, lenders, and other third parties. An effective investigation may reveal complex arrangements, including legal and equitable security, company charges, and the priority of their satisfaction on sale or in the event of insolvency.

Key Term: legal mortgage
A legal mortgage is a security interest in land created by deed in compliance with statutory formalities. It provides the lender (mortgagee) with a legal interest in land and the benefit of statutory remedies for enforcement. For registered land, a legal mortgage takes effect only after registration at HM Land Registry.

Key Term: equitable mortgage
An equitable mortgage arises when a mortgage fails to meet the formal requirements for a legal mortgage but is nonetheless recognised in equity. This may occur by written agreement, by deposit of title deeds, or where the mortgagee holds only an equitable interest.

Mortgages and Charges: Legal Framework

A mortgage is most commonly used as security for repayment of a loan from a lender, allowing the lender to recover their money by sale (or, less commonly, foreclosure) of the property if the borrower defaults. A charge is a broader term that encompasses any form of security interest over property—including but not limited to mortgages. Charges can be legal or equitable, and the law distinguishes between fixed and floating charges.

Creation of Mortgages

A legal mortgage in registered land must be created by deed (complying with the Law of Property Act 1925 s.52 and, for deeds after 1990, Law of Property (Miscellaneous Provisions) Act 1989 s.1), and must be registered at HM Land Registry. For registered estates, a legal mortgage is created by the mortgagor executing a deed expressly charging the property as security for repayment (this is now the most common method, especially in residential property). Mortgages by demise or sub-demise—where the mortgagor grants a long lease to the mortgagee—are now rare and largely limited to unregistered land.

In unregistered land, a legal mortgage is also created by deed and may be protected by the deposit of title deeds with the mortgagee. Such deposit gives the mortgagee control over dealings with the land, as the owner cannot sell or further mortgage without the deeds.

Key Term: statutory charge
A statutory charge is a security interest arising by operation of legislation, such as a charging order securing judgment debt. Examples include charging orders under the Charging Orders Act 1979 and certain charges for legal aid costs.

Equitable mortgages may arise in several scenarios:

• Where parties enter into a written agreement to create a mortgage but do not execute a deed, rendering the transaction a contract to create a mortgage which is effective in equity only.
• Where the mortgagor has only an equitable (not legal) interest in the land.
• Where title deeds are deposited with a lender as security—even if there is no formal deed, equity treats this as an equitable mortgage.

The formalities for an equitable mortgage depend on the circumstances. A simple deposit of deeds may suffice, but an agreement to create a mortgage must be in writing and signed by the mortgagor, in compliance with s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 and s.53(1)(c) of the Law of Property Act 1925.

Charges by Companies

Companies may create both fixed and floating charges as security for borrowings. Fixed charges attach to specific assets, such as land, at the time the charge is created. A floating charge, by contrast, hovers over a class of assets (such as stock or receivables) and allows the company to freely deal with those assets until the charge "crystallises"—usually upon default, insolvency, or another specified event—at which point the floating charge becomes a fixed charge over the assets then within that class.

Key Term: floating charge
A floating charge is a security interest created by a company or LLP over a shifting class of assets which the company may continue to manage and dispose of until crystallisation, when the floating charge becomes a fixed charge over those assets.

Floating charges are most commonly found in debentures and other commercial lending contexts. For validity, a charge created by a company must be registered at Companies House within 21 days of its creation. Failure to comply with this requirement may render the charge void against a liquidator or creditor if the company later becomes insolvent.

Investigation of Title: Mortgages and Charges

When acting for a buyer, a mortgagee, or a purchaser of a charge, it is necessary to ascertain the existence and status of any mortgages or charges affecting the property. The process of investigation varies depending on whether the land is registered or unregistered.

Registered Land

In registered land, mortgages and charges are entered in the charges register of the title, which is maintained by HM Land Registry. The charges register will identify any legal mortgages, the date of their creation, the details of the lender, and other forms of charge (including, where applicable, equitable charges that are protected by the entry of a notice).

Key Term: charges register
The charges register is the section of the HM Land Registry title which records all adverse interests affecting the land, including mortgages, financial charges, covenants, and easements.

A thorough investigation of title in registered land therefore involves:

• Scrutinising the charges register for legal charges, notices protecting equitable interests, and restrictions indicating the need for a lender’s consent to any disposition.
• Reviewing the proprietorship register for restrictions, such as a Form A restriction in cases of co-ownership, or restrictions imposed by a mortgagee to prevent the registration of a disposition without their consent.

If the charges register discloses an existing mortgage or other charge, the buyer’s solicitor must ensure that the seller’s solicitor undertakes to redeem and discharge the charge prior to or on completion, providing formal evidence of discharge (either a DS1 for the whole title, a DS3 for part, or electronic discharge notification). Where more than one charge is revealed, enquiries may need to confirm the order of priority, seek additional undertakings, and ensure that the sale proceeds will be sufficient to clear all charges.

For commercial transactions involving companies, an up-to-date company search at Companies House is advisable to identify the existence of registered charges (including floating charges) that may not be disclosed at the Land Registry, and to confirm their status and whether any are crystallised—potentially affecting the buyer’s intended use or ability to register as proprietor.

Key Term: restriction
A restriction is a register entry limiting how a disposition of the registered estate can occur, often requiring a third party’s consent or other condition to be satisfied before registration.

Key Term: unilateral notice
A unilateral notice is an entry made on the register to protect an interest claimed by a third party, without the proprietor’s consent.

Unregistered Land

In unregistered land, there is no official title register. Instead, the investigation of title relies on the documentation provided in the epitome or abstract of title, which should demonstrate a "good root of title" going back at least 15 years and show the chain of ownership up to the seller. Mortgages and charges will appear as deeds in the chain of title. A first legal mortgage is usually protected by the lender’s retention of the title deeds—making it practically impossible for the mortgagor to deal with the land without the lender’s knowledge or consent.

Key Term: epitome of title
A chronological collection of documents, including title deeds, conveyances, and previous mortgages, establishing the seller’s title to unregistered land.

In the case of second or subsequent (puisne) mortgages, which are not protected by deposit of deeds, the mortgagee must register the charge as a Class C(i) land charge at the Land Charges Department (now administered by HM Land Registry). Equitable charges may also be encountered and should be protected by the appropriate class of registration—typically Class C(iii) for general equitable charges.

Key Term: land charges search
A search of the Land Charges Register at Plymouth (using form K15) to detect registered land charges against any owner in the chain of unregistered title. Proper searches must be conducted against all variations of relevant names for each period of ownership since 1926.

The buyer's solicitor examines the deeds in the epitome, checks for undischarged mortgages (looking for a separate deed of release or a vacating receipt on the mortgage deed), and undertakes land charges searches against all estate owners revealed in the title documents. This process helps establish whether equitable charges, restrictive covenants, or other legal matters exist and whether they are binding on a prospective purchaser.

Key Term: good root of title
A document (usually a conveyance) that is at least 15 years old, deals with the whole legal and beneficial estate, contains an adequate description of the property, and casts no doubt on the title.

If a mortgage has been redeemed, evidence such as a receipted mortgage deed or a deed of release must be included. If a mortgage remains undischarged, the buyer's solicitor must ensure a firm undertaking is provided to pay off the debt and obtain evidence of discharge by completion.

Priority of Mortgages and Charges

The existence of multiple mortgages or charges on the same property raises questions of priority—namely, in what order will each holder be repaid if the property is sold or repossessed, particularly in default or insolvency situations.

Key Term: priority of charges
The legal order in which secured lenders or charge holders are repaid from the proceeds of a sale or other realisation of the charged property.

Priority in Registered Land

In registered land, the basic rule is that the priority of legal mortgages and registered charges depends on the order of registration at the Land Registry. The first charge to be entered on the register holds priority over subsequent charges. This means that, in certain cases, a later-created mortgage may take priority if it is registered first. Registration is therefore necessary, and applications should be lodged swiftly after completion to preserve priority—supported by an OS1 (whole title) or OS2 (part title) search that provides a 30-working-day priority window to register dealings.

The system is not rigidly "first in time" but is determined by the timing of registration rather than the date of creation. Practical pitfalls exist: if a party's priority search expires before they lodge their application, a later application could gain priority. Overriding interests, such as the rights of persons in actual occupation, may also affect priority and bind purchasers even if not on the charges register.

Where secured lending involves further advances, the issue of tacking arises—whether a future loan by an existing mortgagee takes priority over subsequent registered charges. Tacking will only apply if certain conditions are satisfied, such as a specific agreement and entry of the requisite information on the register (see LRA 2002, s.49).

Priority in Unregistered Land

In unregistered land, rules of priority differ:

• A first legal mortgagee typically holds the deeds and cannot be overridden by subsequent interests.
• Second (puisne) legal mortgages, which cannot obtain the deeds, must be protected by registering a Class C(i) charge at the Land Charges Register.
• Equitable mortgages and other equitable interests are subject to the doctrine of notice, but since 1926 must be protected by the appropriate class of land charge registration to bind subsequent purchasers. Registration against the correct estate owner’s name is necessary; registration against the wrong name or failure to register will render the charge void against a purchaser for value.

Key Term: puisne mortgage
A second or subsequent legal mortgage over unregistered land, not protected by deposit of the land's title deeds, and therefore protected by registration as a Class C(i) land charge.

Key Term: class C land charge
One of six classes of land charge; Class C(i) covers puisne mortgages; Class C(iii) covers general equitable charges.

If the mortgage or charge has not been registered and the land is sold for value, the interest will not bind the buyer. Pre-existing legal interests, however, still bind irrespective of notice.

Company Charges

For companies incorporated in England and Wales, all fixed and floating charges must be registered at Companies House using the prescribed form (usually an MR01) within 21 days of their creation. This applies to land owned by a company whether registered or unregistered. Failure to register a charge at Companies House renders it void against a liquidator, administrator, and creditors in the event of insolvency, though it remains valid as between company and lender. Registration at Companies House is supplemental to, and not a substitute for, registration at the Land Registry if the charge is over registered land.

Key Term: company search
An enquiry at Companies House to determine if a company is subject to insolvency proceedings or has charges (fixed or floating) registered against its assets.

If a company is selling property, the buyer’s solicitor must conduct a company search immediately before completion to check for registered charges and confirm there are no undisclosed fixed or floating charges that could affect the property or transaction.

Discharge and Redemption of Mortgages

On completion of a sale or refinance, it is necessary that all existing mortgages and charges affecting the property are validly discharged, ensuring that the buyer or mortgagee takes free of those interests and may be registered as proprietor.

Key Term: redemption
The process by which a borrower repays a secured loan in full and the lender releases its charge over the property.

Key Term: discharge of mortgage
The formal procedure of removing a mortgage or charge from the legal title, typically evidenced by a DS1 for discharge of a registered legal charge over the whole title, a DS3 for discharge over part, or by a receipted (vacated) deed in the case of unregistered title.

In registered land, discharge is normally effected by the lender completing and submitting a DS1 (for the whole title) or DS3 (for part) to HM Land Registry—or, more commonly, by electronic notification. The seller’s solicitor must ensure that a valid undertaking is in place to redeem the mortgage with the proceeds of sale, and, as soon as the lender confirms redemption, submit evidence of discharge.

In unregistered land, completion requires either a separate deed of discharge or a validly executed vacating receipt on the face of the mortgage deed (usually on the reverse). The buyer’s solicitor should check that this evidence is produced at or prior to completion. If the mortgage has not yet been redeemed, a firm and unconditional undertaking from the seller’s solicitor is required.

Key Term: receipted charge
A mortgage deed endorsed with a signed acknowledgment by the lender that the loan has been repaid and the charge thus satisfied and discharged, serving as evidence of redemption in unregistered land.

Failure to deal with existing charges properly can result in the buyer being bound by them post-completion, with the associated legal, financial, and practical risks.

Floating Charges and Commercial Transactions

Floating charges are a common feature in commercial lending. They enable a company to borrow secured against classes of assets, including property, while retaining the ability to deal with those assets in the ordinary course of business until default or another event causes the security to crystallise.

On investigating title where a floating charge is revealed, the buyer’s solicitor must:

• Check whether the charge has crystallised; if so, it may now operate as a fixed charge, binding the purchaser absolutely.
• Obtain either a release over the property being sold, or confirmation (a certificate of non-crystallisation) from the lender that the charge has not crystallised.

If the floating charge has become fixed, the property cannot be sold free of the charge without the lender’s specific release.

In some cases, a floating charge will "crystallise" on specific events stipulated in the deed—typically the appointment of a receiver, commencement of winding up, or default under the associated facility agreement. After crystallisation, the company is prevented from disposing of the affected assets without the lender's consent.

Remedies of the Mortgagee

If a mortgagor defaults, the mortgagee (lender) has a range of remedies—some available at law and others in equity. The appropriate remedy depends on the form of mortgage (legal or equitable), the documentation, and the circumstances of default.

• Sue for the debt: The lender may take action to recover the money owed.
• Power of sale: Statutory power of sale usually arises under s.101 Law of Property Act 1925, becoming exercisable after the principal or interest is in arrears by at least two months. On a sale, the mortgagee must act in good faith and obtain a proper price.
• Possession: The lender may take possession without a court order except for residential properties, but generally seeks a court order to avoid potential liability.
• Appointment of a receiver: Often preferred for income-producing properties (e.g., commercial), as the receiver will manage the property and apply income towards the debt.
• Foreclosure (rare): The mortgagee applies to court for an order that they become the absolute owner, extinguishing the mortgagor’s interest.

For an equitable mortgagee, the remedies are similar, but enforcement may require court assistance (especially where the legal estate does not pass). An equitable mortgagee may lack the statutory power to convey the legal estate and might need to apply to the court for a vesting order.

The order in which the proceeds of sale are applied is dictated by the rules of priority—first to redeem the charges in order of priority, with any surplus passing to the borrower.

Priority Disputes and Risks

Failure to investigate, protect, or discharge mortgages and charges can expose buyers, lenders, or even solicitors to significant risk:

• If a charge is not correctly registered or protected, or if an application for registration is delayed beyond a priority period, a subsequent registrant may take priority.
• Where a floating charge crystallises before completion, or if a lender’s undertaking is breached, a buyer may be forced to take subject to the charge.
• Overriding interests—particularly the rights of persons in actual occupation—may have priority over a registered charge if discovered after registration.

Ensuring thorough due diligence—verifying that all undertakings are effective, registering security promptly, and checking for both pending and registered interests—is necessary to avoid unintended consequences.

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 should secure an unconditional undertaking from the seller’s solicitor to redeem both mortgages on or before completion and to provide evidence of discharge (DS1s or electronic confirmation) for both. The solicitor must ensure the sale proceeds are sufficient to meet the redemption figures for both mortgages and that redemption statements from the lenders have been obtained. If appropriate undertakings cannot be provided or there is doubt about redemption, completion should not proceed.

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 determine whether the floating charge has crystallised. If it has not, request a certificate of non-crystallisation from the charge holder (lender). If the floating charge has crystallised, the lender’s release or confirmation of discharge must be obtained prior to completion. The solicitor should also ensure that registration at Companies House was effective and that any agreed undertakings cover the release of this charge.

Worked Example 1.3

On investigating title to unregistered land, a solicitor finds reference to a second mortgage, but no separate deed of release and no vacating receipt on the mortgage deed. What should the solicitor do?

Answer:
The solicitor must require either a valid deed of release from the lender or a proper vacating receipt endorsed on the mortgage deed before completion. Absent such evidence, the buyer risks taking the property subject to the undischarged mortgage. An undertaking to procure such evidence on completion may be acceptable if properly secured, but the ideal is to resolve this before or simultaneously with completion.

Exam Warning

In registered land, do not assume an earlier-dated charge will have priority if it is registered after a later charge. The order of registration (not creation date) determines statutory priority, subject to the protection of overriding interests.

Revision Tip

Always conduct both charges register (registered land) and land charges (unregistered land) searches. Check for all relevant variations of names and historic county boundaries to avoid missing a registered charge, especially where land has changed hands or been subdivided multiple times.

Key Point Checklist

This article has covered the following key knowledge points:

• A legal mortgage must be created by deed, and—where the land is registered—must be registered to take effect as a legal charge.
• Equitable mortgages arise where there is an intention to create security but formalities for a legal mortgage are not met, or where the interest mortgaged is only equitable.
• In registered land, the charges register and the proprietorship register must be checked for mortgages, charges, notices, and restrictions; in unregistered land, the epitome of title and land charges search serve the same purpose.
• Priority of charges in registered land is determined by the order of registration; in unregistered land, by date of creation or, for equitable interests, by the date and accuracy of land charges registration.
• Company charges, whether fixed or floating, must be registered at Companies House within 21 days of creation, otherwise they are void against creditors and liquidators.
• On completion, all existing mortgages and charges must be discharged, and satisfactory evidence (DS1, DS3, electronic discharge notification, or receipted deed) provided before title can be registered in the buyer’s name.
• When purchasing from a company, full company searches must reveal all charges and confirm whether any have crystallised.
• Floating charges allow companies to deal with assets until crystallisation; after crystallisation, lender consent or formal release is needed for disposal.
• Failure to investigate, protect, and obtain discharge of charges properly may leave a buyer bound by existing mortgages or security interests, resulting in legal and financial risk.

Key Terms and Concepts

• legal mortgage
• equitable mortgage
• statutory charge
• floating charge
• charges register
• restriction
• unilateral notice
• epitome of title
• land charges search
• good root of title
• priority of charges
• puisne mortgage
• class C land charge
• company search
• redemption
• discharge of mortgage
• receipted charge