Securing a Debt Against Another’s Property
In terms of a person’s assets, land is unique in that a debt can be secured against it without the owner giving up control of the asset. Items can of course be bought on hire purchase agreements but these remain the property of the seller until the debt is paid, and an item can be pawned but the pawnbroker will retain it pending full repayment.
Securing a debt against a person’s property, particularly where you are doing so because that person has defaulted, seems to most like an aggressive move, and it can be, but it can also be amicable. It gives the creditor the comfort of knowing that the debt will eventually be repaid while not seriously inconveniencing the debtor (provided the creditor does not then seek an order for sale). The alternative might be for the debtor’s personal possessions to be seized and sold.
Methods of Securing a Debt Against Another’s Property
There are a number of different ways to secure debt against a property which vary in terms of their effectiveness and complexity. With the exception of a Charging Order, all will require either the cooperation of the owner or at least will require the land registry to give notice of the registration to the owner, who may then successfully object.
Private Legal Mortgages
A mortgage is the best form of security as it the mortgagee a legal interest in the property and entitles him to repossess and sell the property without further recourse to the courts (unless the owner will not vacate voluntarily in which case an Order for Possession and Warrant for Eviction will need to be obtained to remove him) if the borrower defaults. Furthermore the owner will be unable to sell the property unless he can produce to the buyer a discharge document signed by the lender, who will provide such a document on repayment of the debt.
There are certain requirements that must be met for a mortgage to be a legal mortgage and it will necessary to instruct a conveyancer to draft the deed. Unlike a mortgage provided by a high street lender the same conveyancer cannot for both borrower and lender in respect of a private mortgage. There does not need to be a provision for interest or for regular repayments for a mortgage to be valid. It can simply require a fixed sum to be paid by a given date or can grant the lender a share in the equity.
Where a mortgagee sells, he must repay any debts which were secured on the property prior to the creation and/or registration of his interest before taking any money for himself but he does not need to pay any that were created or registered subsequently to his interest if, after taking what is owed to him, there are insufficient proceeds to do so. This right to disregard inferior interests is known as “overreaching”
Charging Orders
An unsecured creditor may apply to the Court for a charging order against a debtor’s property. Commercial lenders such as credit card companies and utility companies will often protect their interests in this way. The order will require the debtor to pay a fixed sum (though interest will accrue on that sum) and will oblige the land registry to accept an application to register the order as an equitable charge. As with a mortgage, the owner could not sell the property with the consent of the beneficiary of the charging order.
The order is granted in two stages. First, an interim order will be granted in order to protect the priority of the interest being claimed and then if the Court is satisfied with the creditor’s evidence a final charging order will be granted. Often only the interim order will be registered, which is sufficient.
Unlike a legal mortgage, an equitable mortgage does not entitle the beneficiary to take possession of the property and sell it, though once a charging order is obtained it might be possible to obtain a further order of the Court, called an Order for Sale. This entitles the beneficiary to sell but still does not contain any powers of overreaching.
Notices (Unilateral or Agreed)
A notice does not prevent the owner of a property from completing a sale however it does put a purchaser on notice (hence the name) that the beneficiary has an interest in the property.
There are two types of notice, unilateral and agreed. A unilateral notice should be used where the applicant cannot obtain the consent of the owner and an agreed notice should be used where the owner is prepared to consent.
Although much less effective at securing an interest than a mortgage or charging order, notices have the advantage of being simple to register. A solicitor is not usually required which keeps costs down. The necessary forms can be obtained free from the land registry’s website.
An application for an agreed notice will need to be signed by the owner of the property and although an application for a unilateral notice will not, the land registry will write to the owner informing him of the application and giving him the opportunity to object. Unless there is an objection then evidence of the interest being claimed does not need to be supplied however it is an offence to register a notice or restriction against another’s title without justification.
If a property which is the subject of a notice is sold the purchaser should insist that the form necessary to remove to, signed by the beneficiary, is supplied on completion. Obviously the beneficiary will only sign this if the debt is satisfied. It is often possible however to have a notice removed following a sale without the consent of the beneficiary depending on the circumstances.
Restrictions
A restriction prevents the property from being sold without the consent of the beneficiary or without some evidence that a specified action has been performed. In terms of securing a debt the restriction would require the consent of the creditor to the sale and that consent would not be granted unless the debt was repaid.
Unless the restriction is as a result of a Court Order or bankruptcy proceedings then the consent of the owner is needed in order to register it. A restriction alone does not prove that the interest being claimed is valid and will not provide the details of it however it will protect the priority of the interest if it is valid.
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