What is a Deed of Substituted Security?
25/04/2019
85
6 min read
A Deed of Substituted Security is a document which enables a lender's charge on an existing title (i.e. whatever the value of the remaining financial interest in the property they continue to own) to port to a new one.
Purely for example, let's say the original title was a freehold property which a bank had a charge on; this deed could port this charge to a different property, let's say another freehold property, as long as the bank agreed and assuming the charge amounted to the same financial value.
In residential conveyancing, we come across this mainly in two areas, lease extensions and transfers of part. Note that for both of these, the value of the property in question changes (lease extension increases the value of a lease in the first case and in the case of a transfer of part, if you split up a property then the remaining property decreases in value) but the lender would still wish to maintain whatever financial interest it has in the property in full.
When you extend your lease, a whole new lease is drawn up rather than the existing one modified. Let's say you're completing a formal lease extension and your lease term is increasing by 90 years with a peppercorn ground rent. A new title is drawn up - it's the same property in this case - with the extended lease term and changed ground rent.
With a Transfer of Part, a new title is drawn up because at least one extra separate title has been created from the original title; an example here could be the creation and sale of an annex from a larger house.
This article examines matters related to Deeds of Substituted Security and related matters in the context of residential conveyancing and looks at:
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Is your lease running down to the significant 80 year mark or below?
The shorter your lease term becomes, the more expensive it is to extend and you might find you can't remortgage and have greater difficulties selling, particularly to mortgage buyers.
Entrust your lease extension to our experienced property lawyers; whether your pursue the formal or informal route, they can help you get the best deal in the most efficient and speedy timeframes.
We also offer Lease Extension Valuations from expert RICS Valuers (click for more details) to help you establish whether your freeholder's premium offer is a fair one.
* Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels
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Why do you have to grant a new lease when extending?
Once you've concluded terms with your landlord/freeholder for a lease extension, your landlord actually has to grant you an entirely new lease on your flat.
This might reasonably strike you as unnecessary - why wouldn't you just add a short document to the original lease contract saying that 90 years had been granted to the original lease, for example?
In fact this used to be the way things were done, with a few standard words written on the back of the original lease. However, this has now completely changed.
Existing lease has to be handed back first
The Land Registry views that a new lease granted with an extended term acts as if the original lease has been handed back - or 'surrendered' - to the freeholder. This is irrespective of whether you've taken the informal or the Section 42 Formal Route to your lease extension.
When your property lawyer has completed the extension lease, they have to apply to the Land Registry for registration of the new lease which will fully replace the old lease.
How does getting a new lease benefit you as a leaseholder?
When you get your new lease, it is also registered against the landlord's title.
This means that, should the landlord later decide to sell the block with your property in it, any buyer of the freehold will have notice that the purchase includes your new and extended lease.
What about your mortgage and your lender's charge on your property?
You have to ask your bank to confirm that they agree to your extension. For reasons mentioned above, this will invariably be given as the new extended lease represents better value and security for them.
In order that you comply with the Land Registry's rules however, you'll have to sign a deed of substituted security which effectively exchanges your lender's charge on your old lease for an equivalent charge on your new lease.
There is an alternative; this is examined below.
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Which parties process Deeds of Substituted Security?
Your appointed property lawyer completes the Deed of Substituted Security on your behalf; it's a simple enough form and more or less states what's been described, i.e. that the old security involving the old lease is to be exchanged for the new one.
Your conveyancing solicitor will already have secured your lender's agreement prior to sending them this form and, most importantly, you are required to sign it.
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What alternatives are there to using a Deed of Substituted Security?
The Land Registry actually prefers, instead of a deed of substituted security, that your lender creates an entirely new mortgage deed.
In this situation, your lender has to notify the Land Registry on completion that the original mortgage has been discharged.
This method is regarded as being more complicated and most lenders opt to use deeds of substituted security instead, however the choice ultimately depends on the lender.
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In what situations are Deeds of Substituted Security often used?
Deeds of Substituted Security are often used non-residential/commercial transactions.
Two highly common situations where a borrower might wish to substitute security in a property finance transaction are:
- if the lender has taken security over a portfolio of properties, it may have agreed with the borrower to include a mechanism in the loan and security documentation whereby properties in the lender's security package can be substituted for alternative properties
- where the borrower operates a business with a changing portfolio of investments, for example, an investment fund—such a borrower will be under commercial pressure to act swiftly when looking to acquire or dispose of properties and will want the ability, under its financing and security arrangements, to dispose of properties and replace them with new ones
Other reasons for looking to substitute security may be to release capital (whether to the borrower as equity or to the lender by enabling part repayments of debt) or to allow for a non-performing property asset to be replaced by a superior asset that will ensure on-going compliance by the borrower with the loan documentation and maintain the value of the lender’s security package.
Is your lease running down to the significant 80 year mark or below?
The shorter your lease term becomes, the more expensive it is to extend and you might find you can't remortgage and have greater difficulties selling, particularly to mortgage buyers.
Entrust your lease extension to our experienced property lawyers; whether your pursue the formal or informal route, they can help you get the best deal in the most efficient and speedy timeframes.
We also offer Lease Extension Valuations from expert RICS Valuers (click for more details) to help you establish whether your freeholder's premium offer is a fair one.
* Fixed Fee – No Sale No Fee – On all Mortgage Lender Panels
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