What is a Legal Charge on a Property?
When you take out a mortgage, you're borrowing money from a lender to purchase a home. To protect their investment, many lenders will require a security interest in the property.
This is where legal charges come into play; a legal charge acts as a lien on your property or secured loan, granting the lender the right to sell and recover their funds if you default on your loan payments.
Legal charges also protect your property ownership rights. They ensure that you have a clear title to your property and that no other claims can be made against it without your knowledge or consent.
What is a legal charge?
A legal charge is essentially a security interest that a lender places on a property as a safety net. When you take out a mortgage, your lender will typically register a charge against your home at the Land Registry.
The legal charge is created through an official document, such as a mortgage deed, which outlines the loan terms and the lender's security interest in the property.
This charge doesn't transfer ownership of the property to the lender. However, it grants them specific rights, including the ability to sell the home if you default on your loan payments:
- The lender may take possession of the property if the borrower defaults on their loan.
- The lender can sell the property to recover the outstanding debt.
- The lender may require the borrower to pay rent on the property while they remain in possession.
If multiple legal charges are registered against a property, their priority determines the order in which they are satisfied in the event of a sale.
Generally, the first charge registered takes priority over subsequent charges. However, there are registered charges that are exceptions to this rule, such as charges created before the purchase of the property or charges that are specifically protected by law.
If a borrower defaults on their loan, the lender can enforce the legal charge by taking legal action. This may involve obtaining a court order for possession of the property or sale. The lender may also appoint a receiver to manage the property and collect any rental income.
Use SAM to secure your loan agreement
A legal charge can be applied to secure any loan, not just a mortgage.
As part of our loan agreement service, we can secure a personal loan between private individuals against the borrower's property by registering a legal charge at the Land Registry.
The charge notifies any potential buyer and ensures the lender gets their money back from the sale proceeds.
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Types of legal charges
A mortgage charge is the most common. It happens when a borrower gets a loan to purchase a property. The lender secures the loan by registering a mortgage charge against the property.
- A land charge is registered against a property to protect certain interests, such as rights of way, restrictive covenants, or charges created before the property was registered at the Land Registry.
- A charging order is used when a court orders a property owner to pay a debt. It gives the creditor the right to sell the property to satisfy the debt.
- An equitable charge typically arises from a contract or agreement between two parties. It is not registered at the Land Registry but is enforceable in equity.
- A statutory charge is created by a statute. Examples of statutory charges include charges created by the Inland Revenue to secure tax debts or charges created by local authorities to secure payment for services.
Multiple legal charges can be registered against a property. The order in which the charges are registered determines their priority, with the first charge registered taking priority over subsequent charges.
However, there are exceptions to this rule, such as charges created before the property was registered or charges that are specifically protected by law.
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Lending money to a loved one?
When lending money to a loved one, especially for a home, consider a loan agreement. If you're helping a family member buy their first home, it might seem formal, but it's a smart move.
A loan agreement document will formally outline the terms of the loan, including the amount borrowed, interest rates, and a repayment schedule.
- Clear expectations: Avoid misunderstandings and ensure everyone knows the terms of the loan, including the repayment schedule, interest rate, and any potential penalties for late payments.
- Plan for the unexpected: Prepare for tough times like job loss or divorce. A legal charge can help protect your investment in case your loved one is unable to make their payments. This means you will be repaid before other creditors as long as the charge is above others in the priority order.
- Estate planning: Include the loan in your will if you pass away. This ensures that your estate can recover the loan if your loved one is unable to repay it. If you were to pass away before the loan is fully repaid, the legal charge will transfer to your estate and the estate will take the necessary steps to recover the outstanding loan amount.
A registered charge ensures you can get your money back, even in difficult situations. It's a wise investment in both your finances and family relationships.
What if we are a separating couple?
When couples with children separate, a Mesher Order could be valuable. This allows the family home to remain in joint ownership until a specific event occurs, like a child reaching adulthood.
When the event happens, the home is sold, the sale proceeds are divided, and a chargeback is given to the party who benefited from the order. Useful if:
- If you want to stay in the family home but can't afford the mortgage alone, a Mesher Order can help.
- Your former spouse remains on the mortgage, but they might not need to contribute to payments.
Similar to a Mesher Order, a Martin Order can be used when there are no children. This allows one party to live in the home indefinitely or until remarriage. A legal charge is registered to reflect this arrangement.
How does a registered charge affect me as a property owner?
While a registered charge might not directly affect your daily life as long as you adhere to your mortgage terms, you should be aware of its legal implications too. For instance, many standard mortgages restrict renting out your property without lender approval.
When selling or remortgaging, you or your solicitor must carefully calculate the outstanding debt and ensure it's paid off as the lender releases the charge.
The process itself is usually straightforward but can vary between lenders. Working with a solicitor familiar with your lender's requirements can streamline the process.
Restrictions on property use
A registered charge could impact your ability to use and enjoy your property. While the specific restrictions can vary depending on the terms of your mortgage agreement, some common limitations include:
Alterations: You may need to obtain your lender's consent before making significant alterations to the property, such as extensions, renovations, or structural changes (like removing a load-bearing wall).
Tenancy: The lender may restrict your ability to rent out the property or impose conditions on the tenancy agreement.
Insurance: You may be required to buy and maintain property insurance to protect the lender's interest.
Maintenance: The lender will likely require you to keep the property in good condition and make necessary repairs as and when they appear.
Foreclosure potential
The most severe consequence of a registered charge is the risk of foreclosure. If you default on your mortgage payments, the lender has the right to recover their funds.
- You may lose your home and become homeless.
- A foreclosure can be devastating to your credit score, making it difficult to obtain future loans or credit.
- The process of foreclosure can be emotionally and financially draining.
- You may be responsible for legal fees associated with the foreclosure process.
To avoid foreclosure, make your mortgage payments on time and communicate with your lender if you are experiencing financial difficulties.
If you are struggling to make your payments, there may be options available to help you avoid foreclosure, such as loan modifications or forbearance agreements.
Securing a new mortgage on a property with an existing legal charge
The priority of a legal charge determines the order in which lenders are repaid in the event of a property sale.
To secure a new mortgage, the new lender will typically require the existing lender to grant a postponement of charge. This means that the new mortgage will take priority over the existing charge.
While most lenders are willing to grant a postponement of charge, there might be instances where negotiations are required to reach an agreement. The existing lender's financial health and the terms of the original mortgage could influence the negotiation process.
Selling a property with a charge and transferring the charge to a new property
It is possible to use a Deed of Substituted Security document to transfer a lender's charge on an existing title to a new one.
For example, you might own the freehold on a three-bedroom house which your mortgage lender has a charge on, and you can transfer this charge to another three-bedroom freehold property as long as the lender agrees.
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What happens if I pay off my mortgage?
Once you've fully repaid your mortgage, the lender will typically release the charge against your property. This means that the security interest that the lender had in the property is no longer in effect.
While most lenders automatically release charges upon full repayment, some may impose an administration fee, especially for early repayment.
This fee can vary between lenders; your final redemption statement should outline any potential charges. If you're unsure, contact your lender directly.
The process of releasing a registered charge
- The lender will provide you with a notice of satisfaction, indicating that the mortgage debt has been paid in full.
- The notice of satisfaction must be registered at the Land Registry. This can be completed by either the lender or the borrower.
- Once the notice of satisfaction is registered, the legal charge will be discharged from the property. This means that the lender's security interest no longer exists.
- Once the charge has been discharged, you will have a clear title to the property. This means that there are no outstanding debts or encumbrances against the property. A clear title is essential if you plan to sell the property or use it as security for another loan.
What happens if the lender fails to remove the charge?
Often, a lender fails to remove the legal charge at the Land Registry. Luckily, SAM Conveyancing can help.
To fix this, you could write to the lender to request that they remove the restriction but this is most effective when drafted by a solicitor. For a fixed fee of £99 INC VAT, our expert solicitors will review your restriction to help you determine your next step.
This includes a review of the Land Registry documents and restrictions, and the meeting with our solicitor to discuss what you will need to do. The cost for removal will be an additional fee.
Case study of property legal charges - the 2008 financial crisis
Background
The UK's mortgage market, like many others, was significantly impacted by the global financial crisis of 2008.
A key factor contributing to the crisis was the widespread use of high-risk mortgages, often known as subprime mortgages, which were offered to borrowers with poor credit histories.
These mortgages were often bundled together into mortgage-backed securities (MBS) and sold to investors.
The role of legal charges
In the UK, a mortgage is a legal charge placed on a property by a lender. This means that the lender has a security interest in the property, which can be enforced if the borrower defaults on the loan.
During the financial crisis, many UK homeowners who had taken out subprime mortgages found themselves unable to keep up with repayments and faced financial hardship.
As a result, lenders began to foreclose on properties, exercising their legal rights under the mortgage agreements.
A significant number of homeowners in the UK were forced to sell their properties at a loss or were evicted from their homes.
Specific impacts on UK homeowners
Many homeowners saw their net worth plummet as property values declined. The burden of mortgage debt and potential foreclosure led to significant financial stress for many families.
In some cases, individuals and families were forced into homelessness as a result of being unable to maintain their mortgage payments.
Foreclosures and late payments can harm credit scores, making it difficult to obtain future loans or credit.
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