Overview
Priority issues arise where a property is mortgaged to more than one mortgagee. The earlier mortgagee usually has prior entitlement to the proceeds of sale of the security in the event of enforcement. The earlier mortgagee has primary rights to enforce the security.
Generally, a lending institution will expect to have a first legal charge pursuant to a Certificate of Title or its own solicitor’s work. However, issues can arise in connection with second mortgages / charges. A property may become subject to a second legal charge, without the bank’s consent. A bank may have given consent to a second charge in the past. The bank itself may be offered a second ranking charge over another property as security or additional security.
They are various rules determining priorities for different types of assets. For practical purposes, the Land Registry rules in England and Wales will determine the position in relation to security over England and Wales land. This is because all title in England has been subject to mandatory registration since 1990. It is therefore very unlikely that a lender will have to deal with unregistered title.
In Ireland, it is (until 2010) possible to take a charge by deposit of title deeds. This is because the holding of the title deeds is legally significant. A purchaser or bank which does not hold the deeds is deemed on notice that there may be a mortgage by deposit, when the key original deeds are not produced. This type of charge can no longer exist in the United Kingdom since 1989.
Since 2003 the Land Registry no longer issues or requires charge certificates and land certificates to be produced and they are treated of no significance. The register has accordingly become “dematerialised”.
It is possible for mortgagees to agree their respective priorities in a priorities agreement (also called a subordination or inter-creditor agreement). This may change the default position which otherwise arises.
Registered Land Rules
Charges on registered land rank in priority according to the order in which they are registered. The order of registration of legal charges decides which mortgagee is entitled to the sale proceeds of the security in the event of enforcement.
Most banks require a restriction to be placed on title in the English Land Registry to the effect that the property must not be dealt with without notice to the bank. The requirement for a Land Certificate was removed in 2003 and accordingly the retention of the land certificate does not restrict dealing with the land.
A second mortgagee (charge holder) must give notice to the first mortgagee so that the first mortgagee does not gain priority for any further sums advances after receiving notice of the second charge. It is therefore important that once a first mortgagee receives notice of a second charge, that the account is “ruled” so that its priority is not reduced by repayments.
In the absence of actual notice of the second mortgage, the first mortgagee will have priority for sums advanced and outstanding provided this is within the terms of the security (e.g. under an all sums due mortgage).
The holder of a second charge has all the rights of the first mortgagee. However, it must account to the earlier mortgagee for its prior claim to the proceeds. The second mortgagee may generally not take action while the first mortgagee is undertaking the same action. If a second mortgagee appoints a receiver, he must account to the first mortgagee
The second mortgagee can reduce its risks by giving notice to the first mortgagee. However, the second mortgagee has significant disadvantages because of the possible obligation of the first mortgagee to advance further sums, the absence of the title documentation and the right of the first mortgagee to consolidate.
A mortgage will usually contain a condition prohibiting further mortgages. The grant of the second mortgage is likely to be a breach of the first mortgage, thereby entitling the first mortgagee to demand all sums and to enforce. However, even if a further mortgage is given in breach of this condition, this does not make the second mortgage void.
A bank should and normally will protect itself against registration of later mortgages by requiring the entry of a notice on the Land Registry register restricting further mortgages without the consent of the first mortgagee.
It is possible to give notice to the Land Registry of an agreement to enter a mortgage (such as a loan offer) in the case of Land Registry title. This can be protected by a registration of a unilateral notice. This notice gives the beneficiary the opportunity to protect his position before the holder of some adverse charge applies for registration.
Further Advances
Where a charge is made to cover a further advance, the registrar gives notice to the mortgagee where an application for registration is lodged which might affect the priority of the advance. Notice is given by registered post to the place notified for notices. A lender should ensure it has systems to receive and act on such notices.
It is desirable that the charge specifically states that it is to cover further sums if they are advanced, though they may not necessarily be an obligation to advanced. A owner of a registered charge is generally not affected by a later charge unless the advance is made after the date on which notice of the later charge is received.
Where a mortgagee is under an actual obligation to make further advances, this should be noted on the charge and on the Land Register. In this case, the charge will have priority for those further advances made pursuant to that obligation, even after notice of a later charge has been received. If there is no obligation to make further advance and a further advance is made after notification of the subsequent charge, the further advance will not have priority.
A mortgagee may obtain priority by being “subrogated” to the rights of an earlier mortgagee. This can occur if money is advanced by a lender to discharge an earlier mortgage. The mortgagee steps into the shoes of the mortgagee it pays off. It may be necessary to obtain a court declaration to confirm a right of subrogation.
Intercreditor Agreements
When a mortgagee agrees to a second mortgage, it is desirable that an intercreditor, priorities or subordination agreement is put in place to govern the relative priorities and rights of each mortgagee. The expressions have broadly similar meanings.
The intercreditor agreement will usually deal with priority of entitlement to enforce the debts (i.e. the personal obligation to repay) and the securities. The first mortgagee will usually have priority in respect of payments of capital and interest. Generally, there will be restrictions and pre-conditions on payment of interest to the second mortgagee (for example provided that the first mortgage is being serviced and there is no default).
There may be priority for the respective mortgagees within certain bands. For example, the first mortgagee may have priority for £300,000, the second mortgagee for £200,000 and the first mortgagee for any further surplus on sale.
The circumstances where priority will matter most is where the borrower is insolvent and the security is insufficient to cover one or both secured debts. Where a secured creditor’s debt exceeds the value of its security, it is an unsecured creditor in respect of the shortfall.
Insolvency rules prescribe that unsecured creditors are treated equally and that each obtain the same proportionate part of the proceeds (if any) available from the sale of the borrower’s unsecured assets. It is possible for the subordinated lender to agree to turn over its share of the insolvency proceeds to the other lender.
There are a good deal of provisions which can be provided and negotiated in an intra-creditor agreement. Each party may wish to limit the extent to which further advances can be made, without the consent of the other. Provision should be made in relation to what happens on a winding up. The first ranking creditor will ideally want the lower creditor to turn over his share of the proceeds received in a bankruptcy to him, for protection in the event that the security is inadequate.
There are a number types of inter-creditor agreement. Some unexpected consequences can occur for the second mortgagee (or so-called junior creditor) on the basis of certain wording which can place them in a very weak position. Under one type of inter-creditor agreement, the subordinated lender agrees that the liability of the borrower to it, is conditional on the other (senior) lender being first repaid in full. By another type, the subordinated creditor agrees to hold his share of the insolvency distribution on trust for the senior creditor.
Unregistered Beneficial Shares
A borrower often enters a loan agreement contemporaneously with the purchase of the property. The bank will hold an equitable charge over the property by reason of its agreement to take security in return for the advance. This equitable charge has priority over any interest the borrower later agrees or become subject to.
The borrower cannot usually grant an interest having priority over the mortgage because he has made a prior agreement to grant the mortgage and has thereby created an equitable charge. This will generally protect bank against a claim to a beneficial interest by reason of a third party’s contributions to purchase price.
A more problematical situation is where the borrower already owns the property. There may be a beneficial owner of land who has made contributions towards the purchase price, which has not been disclosed to the bank and of which the bank does not become aware. If the beneficial owner is aware of the further advance, he will not be able to claim priority over it.
If the bank is dealing with a known beneficial owner, a consent, deed of priority or waiver should be obtained. It is usually desirable to arrange that the beneficial owner obtains independent legal advice so that it is not later claimed that his consent was obtained by undue influence.
Other Charges
The Courts Office may grant a charging order over property, by way of enforcement of a court order. Priority is determined by the order of registration. See our chapter on English enforcement.
England and Wales has a system of local land charges, which is unique and has no parallel in Ireland. It shows liabilities affecting land by the exercise of powers by local authorities and other public bodies. This may arise where sums are spent by a public body under public health, sewerage legislation etc
Registration in the local land charges register is deemed to give notice of the charge. Each local council maintains a local land charges register. This register sets out charges and burdens which affect land by reason of the exercise by a local authority or other governmental authority of its legal powers. The register also provides a range of useful information relating to properties and their surrounding areas.
One class of local land charges is a financial and equivalent charge. This would typically involve the local authority exercising a power to undertake works on a default and recovering the costs from owner. Entries in the local land charges affect registered land without being registered in the Land Registry. A local land charges which is a financial charge takes effect as if it was a deed of charge created by legal mortgage. A local land charge will be binding on a purchaser. A charge to secure money is not enforceable unless it is registered in the Land Registry.
