Learning Outcomes
After studying this article, you should be able to understand the fundamental principles governing the priority of mortgages and related interests in both registered and unregistered land. You will be able to identify the rules under the Land Registration Act 2002 that determine priority, explain how overriding interests can affect lenders, and outline the concepts of tacking further advances and postponement agreements. This knowledge will equip you to apply these principles to specific factual scenarios typical of the SQE1 assessment.
SQE1 Syllabus
For SQE1, a practical understanding of how the priority of mortgages is determined is essential, particularly when advising lenders or purchasers on the risks associated with existing interests. You should focus your revision on:
- The basic rules governing priority in registered land, including the effect of the Land Registration Act 2002 (LRA 2002), specifically sections 28 and 29.
- The rules governing priority in unregistered land, including the distinction between legal and equitable interests, the doctrine of notice, and the effect of the Land Charges Act 1972 (LCA 1972).
- The impact of registration of mortgages and charges on priority.
- How overriding interests under Schedule 3 of the LRA 2002 can affect the priority of a mortgage.
- The rules relating to tacking further advances onto an existing mortgage.
- The concept and effect of postponement agreements between lenders.
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.
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In registered land, what generally determines the priority between two registered legal mortgages?
- The date the mortgage deeds were signed.
- The amount of the loan secured by each mortgage.
- The date each mortgage was entered on the register.
- The intention of the mortgagor.
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Which of the following equitable interests affecting unregistered land MUST be registered as a land charge under the LCA 1972 to bind a purchaser of a legal estate for money or money's worth?
- A beneficial interest under an implied trust.
- An equitable easement created after 1925.
- An equitable interest arising by estoppel.
- A restrictive covenant created before 1926.
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Under the LRA 2002, which of the following is an example of an interest that might override a registered mortgage?
- An equitable mortgage protected by notice.
- A restrictive covenant registered as a land charge before first registration.
- The interest of a person in actual occupation, such as a beneficiary under a trust.
- A legal mortgage created later in time than the registered mortgage.
Introduction
When a property owner creates more than one mortgage over their land, or where other third-party rights exist alongside a mortgage, it becomes necessary to determine the order of priority between these competing interests. Priority dictates which lender or interest-holder gets paid first from the proceeds if the property is sold, particularly if the sale proceeds are insufficient to cover all secured debts. Understanding these rules is essential for advising lenders on the security of their loan and for advising purchasers on the interests that will bind them. The rules differ significantly between registered and unregistered land systems.
Priority in Registered Land
The LRA 2002 provides a statutory framework for determining the priority of interests affecting registered land. The general rules are found in sections 28 and 29.
The Basic Rule: Section 28 LRA 2002
Section 28 establishes the default rule: the priority of an interest affecting a registered estate is not affected by a disposition of that estate. Essentially, interests rank in order of their creation date. This rule applies unless the disposition is a 'registrable disposition' made for 'valuable consideration' which is then completed by registration, in which case section 29 applies. Therefore, a person receiving land as a gift or inheritance takes it subject to all pre-existing property rights, whether registered or not.
Key Term: Priority The order in which competing interests in land rank against each other, determining which interest prevails or is satisfied first, especially upon sale or enforcement.
Key Term: Registered Land Land where the title (ownership) is recorded in a central register maintained by HM Land Registry, governed by the Land Registration Act 2002.
The Special Priority Rule: Section 29 LRA 2002
Section 29 provides a significant exception to the basic rule. If a registrable disposition (e.g., a transfer, grant of a lease over 7 years, or the grant of a legal charge/mortgage) is made for valuable consideration and completed by registration, it takes priority over any pre-existing interest affecting the estate if that interest is not protected at the time of registration.
An interest is protected if it is: a) A registered charge or the subject of a notice in the register. b) An overriding interest falling within Schedule 3 LRA 2002.
This means a purchaser or mortgagee for value who registers their disposition will take free of pre-existing interests unless those interests are overriding or protected by an entry on the register. This rule highlights the importance of registration for protecting third-party rights.
Key Term: Notice (LRA 2002) An entry made in the charges register of a registered title to protect a third-party interest (other than a trust interest), ensuring it binds subsequent purchasers or chargees.
Key Term: Restriction (LRA 2002) An entry made in the proprietorship register of a registered title that regulates the circumstances in which a disposition of a registered estate or charge may be the subject of an entry on the register, often used to protect beneficial interests under a trust.
Priority Between Registered Charges (Mortgages)
Section 48 LRA 2002 specifically governs the priority of registered charges. It states that registered charges rank in priority according to the order in which they are entered on the register, not the order in which they were created. The first mortgage registered takes first priority, the second takes second priority, and so on.
Worked Example 1.1
Farah owns registered freehold property. On 1st May, she grants a legal mortgage to Bank A by deed. On 1st June, she grants a legal mortgage to Bank B by deed. Bank B registers its charge on 15th June. Bank A registers its charge on 1st July. The property is sold, but the proceeds are insufficient to repay both banks. Which bank has priority?
Answer: Bank B has priority. Under s. 48 LRA 2002, the priority of registered charges depends on the date of registration, not creation. Bank B registered its charge on 15th June, before Bank A registered on 1st July. Therefore, Bank B will be repaid first from the sale proceeds.
Priority in Unregistered Land
The rules for priority in unregistered land are more complex and rely on common law principles, equity, and the Land Charges Act 1972 (LCA 1972).
Key Term: Unregistered Land Land where the title is not recorded at HM Land Registry but is proved by examining historical title deeds.
Legal vs Equitable Interests
The fundamental starting point is the status of the competing interests:
- Legal Rights Bind the World: A legal interest (e.g., a legal mortgage, a legal easement) is generally binding on any subsequent owner or occupier of the land, regardless of whether they knew about it. The main exception is the puisne mortgage (a legal mortgage where the lender does not hold the title deeds), which requires registration as a land charge.
- Equitable Rights and Notice: Equitable interests (e.g., an equitable mortgage, restrictive covenant, beneficial interest under a trust) are binding on subsequent owners unless the owner is a bona fide purchaser for value of a legal estate without notice of the equitable interest ('Equity's Darling').
Key Term: Doctrine of Notice The principle in unregistered land that a purchaser of a legal estate takes free of pre-existing equitable interests if they are a bona fide purchaser for value without actual, constructive, or imputed notice of those interests.
The Land Charges Act 1972 (LCA 1972)
The LCA 1972 established a system for registering certain equitable interests (and the legal puisne mortgage) as 'land charges' against the name of the estate owner.
- Registrable Interests: Include estate contracts (Class C(iv)), restrictive covenants created after 1925 (Class D(ii)), equitable easements created after 1925 (Class D(iii)), and spouse's/civil partner's home rights (Class F).
- Effect of Registration: Registration under the LCA 1972 constitutes actual notice to all persons (s. 198 LPA 1925). A registered land charge is therefore binding on subsequent purchasers.
- Effect of Non-Registration: An unregistered land charge is void against a purchaser of a legal estate for money or money's worth (for Class C(iv) and D charges) or a purchaser for value of any interest (for other classes like C(i) and F). Importantly, the purchaser's actual knowledge of the unregistered interest is irrelevant (Midland Bank Trust Co Ltd v Green [1981] AC 513).
Key Term: Land Charge An interest affecting unregistered land that is registrable under the Land Charges Act 1972 against the name of the estate owner. Registration provides notice to purchasers.
Residual Role of the Doctrine of Notice
The doctrine of notice primarily applies to:
- Equitable interests created before 1926 (when the land charges system began).
- Equitable interests outside the scope of the LCA 1972, such as beneficial interests under trusts (which are often overreached instead).
If an interest falls into these categories, a bona fide purchaser of a legal estate for value without notice (actual, constructive, or imputed) takes free of it.
Factors Affecting Priority
Beyond the basic registration and notice rules, other factors can alter mortgage priority.
Overriding Interests (Registered Land)
As established in section 29 LRA 2002, overriding interests (listed in Schedule 3) bind a purchaser for value even though they are not registered. The most significant for mortgage priority is often the interest of a person in actual occupation (Sch 3, para 2). If a person has a property interest (e.g., a beneficial interest under a trust) and is in actual occupation that is obvious on a reasonably careful inspection, their interest may override a later registered mortgage, unless certain exceptions apply (Williams & Glyn's Bank Ltd v Boland [1981] AC 487). Lenders must make enquiries about occupiers to mitigate this risk.
Key Term: Overriding Interest An unregistered interest listed in Schedule 1 or 3 of the LRA 2002 that binds even a purchaser for value of a registered estate, despite not being entered on the register (e.g., short leases, rights of persons in actual occupation).
Tacking Further Advances
Tacking refers to the ability of a lender to add a further loan (a 'further advance') to their existing mortgage security while maintaining the original mortgage's priority over subsequent charges.
Key Term: Tacking The process by which a lender adds a further advance to their existing mortgage security, potentially retaining the original priority date for the new funds over subsequent charges, subject to specific rules.
Key Term: Further Advance An additional loan made by a lender under an existing mortgage agreement after the initial loan amount has been advanced.
The rules for tacking differ slightly:
- Registered Land (s. 49 LRA 2002): A lender (Lender 1) can tack a further advance with the original priority if:
- All subsequent lenders agree; OR
- The original mortgage obliged Lender 1 to make the further advance; OR
- The mortgage was made without obligation, but Lender 1 had no notice of the subsequent charge when making the further advance (notice here means notification on the register).
- Unregistered Land: The rules are complex, but generally, a legal mortgagee can tack if they had no notice of the subsequent mortgage when making the further advance. An equitable mortgagee usually cannot tack.
Postponement Agreements
Lenders can agree to alter the statutory or common law priority order between themselves. This is done via a deed of postponement or intercreditor deed.
Key Term: Postponement Agreement A contractual agreement between two or more lenders (mortgagees) to alter the priority order of their respective mortgages, differing from the order that would otherwise apply by law or date of registration.
In registered land, such an agreement should ideally be noted on the register to ensure it binds successors, although the agreement itself is contractually binding between the parties.
Worked Example 1.2
Petra owns registered land subject to a first registered charge to Bank X (£100k) and a second registered charge to Bank Y (£50k). Bank X's mortgage deed allows for further advances but contains no obligation to make them. Bank X advances a further £20k to Petra. Bank X was notified of Bank Y's charge via the register before making the further advance. How does the £20k further advance rank?
Answer: The £20k further advance ranks after Bank Y's £50k charge. Although Bank X's original £100k charge has first priority, tacking the further advance requires specific conditions under s. 49 LRA 2002. Bank X was not obliged to make the advance, and it had notice of Bank Y's charge (via the register) when it did so. Therefore, the further advance does not retain the priority of the first charge and ranks after Bank Y's existing charge.
Worked Example 1.3
Giles owns unregistered freehold land. He granted a legal mortgage to Lender A, who took the title deeds. He then granted an equitable mortgage (by written contract) to Lender B, who failed to register it as a land charge. Giles then granted a legal puisne mortgage to Lender C, who registered it as a C(i) land charge. Giles defaults, and the property is sold. What is the priority order?
Answer:
- Lender A (first legal mortgage protected by deposit of deeds).
- Lender C (legal puisne mortgage, protected by registration as a C(i) land charge).
- Lender B (equitable mortgage, unregistered as a C(iii) land charge, is void against Lender C, a purchaser of a legal interest for money's worth). Therefore, Lender A gets paid first, then Lender C. Lender B may get nothing from the property sale if proceeds are insufficient after paying A and C.
Key Point Checklist
This article has covered the following key knowledge points:
- Priority determines the order of repayment for competing interests in land.
- In registered land, priority is governed by LRA 2002 ss. 28 & 29. Generally, registered dispositions for value take priority over unprotected interests (s. 29).
- Priority between registered charges depends on the order of entry on the register (s. 48 LRA 2002).
- In unregistered land, legal interests generally bind all, while equitable interests depend on registration as land charges or the doctrine of notice.
- Failure to register a registrable land charge makes it void against certain purchasers, regardless of actual knowledge.
- Overriding interests (Sch 3 LRA 2002) can bind purchasers of registered land despite not being on the register, significantly impacting mortgage priority (e.g., rights of occupiers).
- Tacking allows further advances to retain original priority under specific conditions (s. 49 LRA 2002).
- Lenders can alter priority through postponement agreements.
Key Terms and Concepts
- Priority
- Registered Land
- Unregistered Land
- Notice (LRA 2002)
- Restriction (LRA 2002)
- Doctrine of Notice
- Land Charge
- Overriding Interest
- Tacking
- Further Advance
- Postponement Agreement
