Where a commercial loan is made for the purchase of a property there is a requirement for formal acknowledgement and terms set out for its repayment. The lender will also require security for the loan by way of what is known as a mortgage or legal charge over the property.
A property owner can raise more funds using the same property by creating further mortgages. The mortgages will rank in priority according to the order shown on the Land Registry and then this can agree the order. It is important because if a sale is ever forced in respect of the property this order determines the order in which loans are repaid.
A legal mortgage has to be made by a deed and signed/witnessed by the borrower though not necessarily by the lender. It is then registered at the Land Registry and becomes available for public inspection.
The contents of the mortgage include provisions for repayment of the loan, provisions for charging interest and covenants to ensure that the borrower keeps the property insured and in good repair and does not transfer ownership in whole or in part to any third party. If the borrower defaults in repayment then statutory powers implied into the mortgage allow the lender to take possession and either or lease the property. There is always the right for the borrower to repay the mortgage (redeem), have the deed receipted as paid (discharged) and have its details removed from the Land Registry. The lender will need to make sure that its security is safe by carrying out the same title investigations (including searches) and surveys as the borrower. In most cases it will rely on the checks made by the buyer’s solicitor who undertakes that nothing is revealed which makes the property unmortgagable. The borrower’s solicitor has a responsibility to the lender to register the mortgage at the same time as the buyer’s title in purchase cases and as soon as possible in all other cases.
If a lender needs to repossess the property then it will require a Repossession Order from the court, after which it can sell as a mortgagee in possession. Where there is more than one charge to different lenders, then the selling lender (if first in line) has to account for the balance of sale proceeds to the next lender in line; otherwise to the borrower. If a second in line lender sells then it has to pay lenders in priority to itself, then after discharging its own liability, account as stated above.
As well as commercial mortgages there are increasing numbers of family loans made in relation to property. Please refer to this section for further details. In all cases of raising funds against property it is of paramount importance to understand all of the conditions of the arrangement and responsibilities of the parties. If in doubt about anything ask your adviser before proceeding. It is our aim to make the process as straightforward as possible for all clients.