In the fourth of a series on the anniversary of the Land Registration Act 2002, an HM Land Registry lawyer considers developments in relation to charges and priorities.

Background to changes to the registration of charges in the Land Registration Act 2002

The main intended changes to the law relating to charges of registered land were not as fundamental as the changes relating to adverse possession and easements. The more exciting changes have been procedural, ie the first steps towards charges being entered in the register by direct electronic action by customers.

The substantive legal changes intended by the Act (LRA 2002) were summarised in paragraph 2.23 of Law Com 271, Land registration for the twenty-first century.

  • to change the law that governs the priority of further advances made under registered charges so that it coincided with the existing practice  of mortgage companies,
  • to provide a new method of making further advances, and
  • to impose a duty on the registrar to notify registered chargees when an overriding statutory charge is registered.

Other changes were put in place.

  • It is no longer possible to charge a registered property by demise or subdemise, a method which had become obsolete in practice. The only methods of creating a legal charge of registered land (s.23, LRA 2002) are either to create a charge expressed to be by way of legal mortgage, or to charge registered land with the payment of money.
  • The Act also made provision for methods of creating charges other than by deed (execution of the charge by deed is required to provide the mortgagee with important powers such as the power of sale, s.101, LPA 1925) in readiness for electronic conveyancing (s.91(5), LRA 2002 provides that a document fulfilling the requirements for electronic conveyancing in the section “is to be regarded for the purposes of any enactment as a deed”).

What is a charge under LRA 2002?

The current law relating to registered charges is mainly set out in Part 5, LRA 2002 (sections 48-57), 23 (owner’s powers), section 30 (effect of disposition/priorities) and Part 9 (rules 101-116), Land Registration Rules 2003 (LRR 2003).

These are overlaid over the  general law relating to charges including the remaining parts of Part III of the Law of Property Act 1925 (LPA 1925), sections 85 to 122,  which deals with mortgagees’ powers, including the statutory power of sale.

Section 48
, LRA 2002 deals with priorities, setting out that registered charges rank as between themselves in the sequential order in which they are shown in the register, unless this priority order is varied by agreement between the chargees. Any such priority agreement will be noted in the register. This is a point which is commonly misunderstood. It is only registered legal charges which rank in priority between themselves according to their order in the register (not the date of the charges or entry in the register).

Whether or not the registered proprietor of a charge takes their interest subject to another interest which has an entry in the charges register or is an overriding interest is a different question, dependent on sections 28 and 30, LRA 2002.

Section 49
This is the provision which altered the legal situation of prioritisation relating to tacking and further advances so that this reflects the practice which had developed between first and subsequent chargees. Under this provision the first chargee’s further advance under a registered charge would rank in priority to the second chargee’s charge unless:

(1) the second charge had given prior notice to the first chargee of the second charge directly in accordance with the rules (r.107, LRR 2003), or

(2)  if the original charge contained an obligation to make the further advance, and that obligation was reflected by an entry in the register in accordance with the rules (r.108, LRR 2003. The form of entry for a charge is: “The proprietor of the Charge dated xxx referred to above is under an obligation to make further advances. These advances will have priority to the extent afforded by section 49(3) of the Land Registration Act 2002” and application for the entry must be made on form CH2), or

(3)  an agreement between the parties to a charge to make a further advance ranking in priority to another charge is entered in the register.

The first of these may appear contrary to the general drive of the Act, to make the register a comprehensive record of land interests without reference to matters off the register, but it appears to have been a practical compromise (paragraphs 7.18 to 7.36 of Chapter VII of Law Com 271).

Section 50
contains the obligation on the registrar to notify a registered chargee of the registration of an overriding statutory charge.

Sections 51 and 52
confirm that registration of a charge has the same effect as a charge by deed by way of legal mortgage (linking the provision into the mortgagee’s powers including the statutory power of sale in s.101, LPA1925). Subject to any entry in the register to the contrary, the proprietor of a registered charge is to be taken to have all the powers of disposition conferred by law on the owner of a legal mortgage but only for the purpose of preventing the title of a disponee from being questioned. This does not impact on the mortgagee’s fiduciary duty, and the right of the mortgagor to seek redress against the mortgagee if this is not observed in an onward sale of the property.

Practical matters – methods of registration

Pending the advent of full electronic conveyancing, the legislative requirement is still that charges must be completed by deed (CH1, or mortgagee’s own deed of charge). The form of charge has not been prescribed by the Act and Rules.

If a charge document lacks the formal requirements for a charge (it must be by deed and contain a charging clause) it may take effect as an equitable charge, for which there is no formal definition (the definition given in Megarry & Wade The Law of Real Property 8th edition (online) paragraph 24-042 is: “An equitable charge is created by appropriating specific property to the discharge of some debt or other obligation without there being any change in ownership either at law or in equity. No special form of words is required: it is sufficient if the parties have made plain their intention that the property should constitute a security.”), and may be protected by notice.

Registration in paper form is by lodging form AP1. An application for restrictions should be made on form RX1 unless the application is for a standard form of restriction and is made in panel 8 of form CH1, or it is for a standard form of restriction made in an approved form of charge (r.92, LRR 2003). HM Land Registry maintains a Commercial Arrangements section which liaises with mortgage providers to approve standard forms of charges and entries (see Approval of mortgage documentation: Practice Guide 30).

So what has changed?

Early completion policy

With effect from 3 August 2009 HM Land Registry introduced a policy of early completion for applications to register a discharge of whole and another transaction where the evidence of discharge is not lodged.

This meant that the registration of the complete parts of the multiple transaction, ie the registration of the transfer, could take place immediately rather than waiting for evidence of discharge of the existing mortgage. Many registrations of the transfer and new charge could thus be completed in a discharge/transfer/charge registration application, subject to retention of the entries relating to the charge to be discharged.

Electronic lodgment and creation of charges

Law Com 271 assumed an early move to electronic completion and registration of charges so that the need for a charge to be executed as a deed would quickly become redundant (paragraph 7.6 of Chapter VII).

It has only been possible to move to electronic lodgement of documents such as charges after September 2012 under the electronic Document Registration System (e-DRS). However, this is still only a method of lodgement

Greater progress has been made on the electronic implementation of discharges, starting with the withdrawal of the electronic notification of discharge (END) system on 3 January 2010 and the introduction of electronic discharge (EDs) and e-DS1s, which both allow charge entries to be cancelled, in some cases automatically, on receipt following inbuilt checks.

Transfers under power of sale

In the case of Swift 1st Limited v Colin [2011] EWHC 2410 (Ch) it was held that a chargee still has a statutory power of sale under s.101(1), LPA 1925 provided a charge has been completed as a legal charge, even where that charge has not been completed by registration (unless a contrary intention has been expressed in the deed). The sale will overreach all rights over which the charge has priority, under s.104(1), LPA 1925. A transfer under the power of sale will be a transfer of the registered estate.

Fraud and rectification

Forged charges and discharges have existed for many years.  Since about 2007, more concerted attacks have been launched by organised criminal rings on property assets focusing on charges.

The first question that arises is whether the ‘mistake’ extends to the resulting charge by the fraudster, where there has been a fraudulent transfer of the title, and an application to rectify the title pursuant to Schedule 4, LRA 2002, and secondly whether this can be rectified at the instance of the original proprietor. A third issue relates to whether the new chargee’s title is in any event subject to the overriding interest of the original proprietor in occupation, or whether the conclusiveness of the new registered chargee’s title under s.58, LRA 2002 is paramount.

HM Land Registry has taken the view based on existing case law that the answer to these first three questions is in the affirmative (Malory Enterprises Ltd v Cheshire Homes (UK) Ltd and others and Chief Land Registrar [2002] EWCA Civ 15).

HM Land Registry identity checks were introduced in March 2008 for charges and discharges where no conveyancer was acting. This complements the KYC (know your customer) checks undertaken by conveyancing and mortgage customers to help counteract the possibility of registration of fraudulent paper discharges and charges by individuals.

Registration at Companies House

The obligation for companies to also register their charges at Companies House within 21 days of creation was gradually extended from companies in England and Wales, to companies in all of the UK from 6 April 2013.

If this is not done, the charge is void against a liquidator, administrator or creditor of the company.

The certificate of registration of charge issued by Companies House must accompany the application to register the charge at HM Land Registry (r.111(1), LRR 2003), together with a certificate or confirmation that the charge is the charge to which the certificate of registration relates.

Where now with charges?

The legislative framework surrounding creation and registration of a legal charge seems relatively stable, although the market is constantly evolving and changing. However, they are in the vanguard of the digital revolution, being, in some cases, fully dematerialised.

Further information

Previous articles  in Landnet: HM Land Registry’s customer magazine

  • Adverse possession (Landnet 38)
  • Easements and overriding interests (Landnet 37)
  • Restrictions and notices (Landnet 36)

Gavin Curry
By Gavin Curry,
Digital Communications and Editorial Officer at HM Land Registry