When should I get a Legal Mortgage Charge?

Those wishing to take the strongest form of security for their loan should secure a legal mortgage charge. These are commonly taken over property and give the lender a legal security interest in the land, on the condition that it will be re-transferred on the payment of money agreed at the time of creation

Why is it Important?

Without a properly drawn up, valid and enforceable legal mortgage charge, an unsecured lender risks losing their money and ranking alongside the borrower’s other creditors if they default on the loan. Taking security is akin to a form of insurance and a legal mortgage charge prevents whoever granted the mortgage from disposing of or otherwise dealing with the asset until the mortgage has been paid off.

What it is / what should be included?

Many types of property can be subject to a charge, but legal mortgage charges are most commonly created over freehold or leasehold land. Where this is the case, they must be signed in accordance with particular formalities (over and above a simple signature) and, in the case of registered land, they must also be registered at the Land Registry. The following provisions are just some of the matters which may need to be addressed in the deed:
  • Definition of the property over which the legal mortgage charge is being created. This should include the title number, if the property is registered.
  • Period during which the secured liabilities will be paid off.
  • Extent of the charge. Acknowledgement that it encompasses all fixtures and fittings, the proceeds of sale of the property and any rights/covenants granted in respect of the property.
  • An obligation to pay the secured liabilities on demand.
  • What borrower warranties and representations relating to the charged property will be necessary? These establish the conditions on which the lender has agreed to lend or take security.
  • Are there any covenants preserving the security and value of the charged property?
  • Similarly, consider any restrictions to be imposed on the borrower creating other security or third party interests over the property.
  • Property insurance. Has the lender’s name been noted on the borrower’s insurance policy or are both parties listed as co-insurers?
  • What are the events of default following which the security can be enforced, and powers of enforcement?
  • What is the order of priority for the application of proceeds?
  • Further assurance and power of attorney. The buyer should take whatever action is necessary to perfect or realise the security.
Whilst the above covers some of the key provisions, additional clauses may need to be included depending on the status of the borrower and specific type of property in question.

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