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Is your lending secured?

Mortgage application with a key Print publication

10/07/2019

Defective security: The basics

An essential component of a conveyancing transaction is to ensure that any funds advanced by a lender are properly secured. This is usually achieved by registering a legal charge against the title of the property being conveyed or remortgaged.  The charge should then remain registered against the property until the loan is repaid in full, at which point and the lender applies to remove its charge from the title.

Unfortunately, things do not always go to plan. Lenders can sometimes find themselves in situations where funds have been advanced and a mortgage account remains active, however no valid security has been obtained.  That may be because a charge has been removed in error or because a charge was not properly registered in the first place.

Immediate investigations

If it becomes clear, for whatever reason, that a charge is not registered against the property as it should be, it is vitally important that action is taken to protect a lender’s position as soon as possible. To achieve this, a unilateral notice should immediately be registered against the title to the property.  The unilateral notice protects a lender’s interest which, until the charge is properly registered, will be a mere equity [1].

The next step is to identify why the charge is not registered. Did the lender discharge the charge by mistake?  Did the Land Registry remove the charge in error?  Was the charge registered in the first place?

The Deed Pack, received by the lender following completion of the conveyancing transaction, will usually include a copy of the Title Information Document, which should confirm whether or not the charge was registered upon completion. If the charge was registered and the lender is not aware of the reason for its removal, the next step is to contact the Land Registry, who should be able to explain who applied to remove the charge, and why.

Did the lender discharge in error?

In some cases the lender may have discharged the charge in error. (In the age of electronic discharge this is more common than you might think.)  If so, it should be possible to re-register the charge by way of Deed of Confirmatory Mortgage, or by issuing a court claim [2] seeking a declaration of mistake and an order to rescind and/or set aside the discharge.

To proceed by way of Deed of Confirmatory Mortgage, the borrower’s co-operation will be required. Although the Deed will make reference to the date of the charge, its actual date of registration will be the current date.  Therefore, if there have been dealings with the property between the date of completion of the original conveyancing transaction and the discovery of the discharge, these will have to be dealt with.  That can be done by agreeing with the borrower of a Deed of Priority, which effectively notes that the lender’s charge takes priority over the subsequent dealings on the register.

Alternatively (and where a borrower’s cooperation may not be forthcoming), a Part 8 Claim seeking a declaration of mistake and an order rescinding and/or setting aside the discharge will enable the Land Registry to re-register the lender’s charge as if the erroneous discharge had never occurred. The lender thereby retains its priority dating back to the date of the original registration of the charge.

Did the Land Registry remove the charge in error?

If the Land Registry has removed the charge in error then it should take steps to re-register the lender’s charge. This is a simple process if there have been no other dealings with the property in the meantime, and no further interests have been registered against the property.  In this situation, a lender may claim its costs for dealing with the discharge from the Land Registry [3].

The worst case scenario occurs where the borrower has sold the property whilst the charge was not registered, as that leaves the lender with no security. In this situation, if there are no alternative practical options (for example, if the borrower has no available alternative property over which the lender could secure and register its charge) then a lender can seek indemnity from the Land Registry for the full mortgage balance.

Was the charge not registered in the first place?

Where the charge was never correctly registered, it will first be necessary to identify the reason for this. Although a copy of the original conveyancing solicitor’s (OCS) file may be helpful, in many cases the issue will not be identified until years after completion of the transaction.  Often, due to lapse of time, the OCS’ file may have been destroyed.

The lender’s Deed Pack should be checked to see if it contains the original executed Mortgage Deed, in which case, this can be lodged at the Land Registry for registration. If the lender does not have the Mortgage Deed and the Land Registry does not hold a copy, it may be possible to execute a new Mortgage Deed and have this registered at the Land Registry, but this will require the borrower’s cooperation.

In some cases there may be technical errors or issues with the registration of the property or with the execution of the Mortgage Deed, or there may be some other reason entirely why registration was not achieved. These need to be considered on a case-by-case basis, and may require an application to the court to rectify whatever anomaly prevented registration.

If there was a failure on the part of the OCS, the lender may be able to pursue a professional negligence claim. This will be dependent upon the particular facts of the case and, of course, the claim must be issued within the relevant limitation period.

WM Comment

In many cases a lender will not be aware of its lack of security unless and until there is a reason to look closely at the mortgage account – for example (non-exhaustively) if a borrower goes into arrears; if the borrower redeems the account; or if the lender sells a portfolio of charges. Whilst a lack of required security is obviously not ideal, lenders should take comfort that all is not lost.  There are several different options for remedying the situation and, in the majority of cases, a specialist litigator will be able to take swift action to protect and reinstate a lender’s security.

For further information, or for expert advice tailored to any case-specific circumstances, please do not hesitate to contact Sarah Tildsley or any member of Walker Morris’ Banking & Finance Litigation Team.

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[1] Equity in English law means ‘fairness’.  The law of equity can, in some circumstances, provide a fair solution where the common law or statute cannot.  In this instance, the law of equity affords a lender at least some recognition and protection in respect of the fact that it has loaned monies, albeit significantly lesser protection than a registered legal charge.
[2] Under Part 8 of the Civil Procedure Rules
[3] in accordance with Land Registry Practice Guide 39

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