Taking Security Chart Notes

Charge by deed expressed to be by way of legal mortgage (must be by deed 52 LPA 1925)

87 LPA 1925 mortgage does not transfer ownership of the property (unlike mortgages over non-real estate assets) however the mortgage gives the lender rights equivalent to a lease of one day less than the duration of the borrower’s lease

Is it worth the lender taking security over leasehold premises?

• Consider how long is left before expiration of the lease (longer the lease the more valuable)

• How much is being paid for the lease and what is the market value?

• If borrower is paying below market value for the lease it is a valuable item for security because the lender will be obtaining it for less than market value (and would therefore be able to make a profit selling the lease on)

• If borrower is paying market rate or above, is not worth taking security over as bank would not make a profit when selling it on because the bank will not be able to sell it on at a premium

• Limitations on assignment/charging – will need to know whether the lease contains restrictions on assignment/charging (if so will need to obtain LL’s consent)

1. Check whether consent is required under the lease

2. 860(7)(a) Registration at Companies House is compulsory – Form MG01

   1. 870(1)(a) must register within 21 days of creation

3. 27 LRA 2002 Registration at land registry within 30 working days as a notice on the charges register

48 LRA 2002 Date of registration determines priority

Assignment

• Assignment involves the transfer of a property interest from the borrower to the lender. That property interest is typically the borrower’s rights against a 3^rd party under a contract e.g. the right to receive an income stream from a contract

• Assignment is equivalent to a mortgage (i.e. transfers legal title) over intangible assets (contracts, goodwill etc)

• Assignment does not require borrower’s consent

• Always check whether there is a prohibition in the contract on assignment

Legal Assignment (for lucrative and small number of contracts)

If Borrower assigns contract to lender and lender then fails to give notice to 3^rd party and borrower later assigns the contract to another assignee, that later assignee will gain priority over the original lender if the subsequent assignee notifies the 3^rd party

3^rd party has notice of the assignment because the 3^rd party must be alerted to the fact that he must, in future, make payments to the lender rather than the borrower. The problems with legal assignment are that

1. The borrower may not want the 3^rd parties to be altered to the fact that he is refinancing

2. Where there are many contracts there will be an administrative burden of alerting all the 3^rd parties

Advantages of legal assignment

1. The lender has priority over equitable assignment

2. The lender can sue the 3^rd party directly rather than having to join the borrower in an action

Equitable Assignment (for lots of contracts but low value or for future contracts)

This is an assignment which does not fulfil one or more of the conditions for a legal assignment (just need intent to assign). Under equitable assignment the borrower continues to receive the money from the 3^rd party and then passes it on to the lender

Advantages of equitable assignment

• No need to give notice to the 3^rd parties (so the refinancing can be kept confidential)

• The assignment can be given to future debts

Disadvantage of equitable assignment

• The 3^rd party who owes the borrower money will get good discharge of his debt by paying it to the borrower instead of the lender

• ‘Set off’ – the debt is taken subject to accruing equities. E.g. if the 3^rd party who owes money to the borrower is also the creditor of the lender (has money in a bank account with the lender) the 3^rd party is entitled to set off what the bank owes to them against what they owe to the borrower

• An equitable assignment does NOT grant the original lender to whom the contract was assigned, priority over subsequent lender who are assigned the contract

• For the original lender to gain some protection, could register it. This would give equitable assignee some protection, because if subsequent assignee purports to gain priority by notifying 3^rd party, he would not succeed if, on inspection of the Registrar, he finds that there has already been a previous assignment

• Lender will have to join the borrower in an action in order to sue the 3^rd party (unlike the position with a legal assignment)

136 LPA 1925

1. Assignment must transfer the whole of the value of the contract (i.e. must assign everything it’s owed under the contract)

2. Rights to be ascertained must be wholly ascertainable and must not relate to part only of the debt

3. Must be in writing and signed by assignor (borrower)

4. Actual notice of the assignment must be received by the 3^rd party for the assignment to take effect

Register at Companies House because of book debts

Register at Companies House because of book debts