A mortgage over land is the most common and effective type of security for a Lender or creditor.  

A mortgage is normally created by deed, that is by a document which is “signed as a deed” by the Borrower.  Documents signed as a deed do not require any monetary consideration to make them valid.  Consideration is required in normal contracts in order to make them valid, but use of a deed avoids this requirement. 

If the land concerned is registered (approximately 80% of land in England and Wales is registered) then the mortgage must be registered against the land at HM Land Registry. 

If the land is unregistered then there is no procedure for registration for a first mortgage.  The Lender holds the title deeds to the land, together with the mortgage document, as his security.  For second mortgages, the mortgage must be registered against the owner of the land.  That register is kept by the Land Charges Registry, which is a separate department of HM Land Registry.  It is not a very satisfactory procedure because one must know the name of the owner to check whether there is a second mortgage on the land. 

A mortgage created by a limited company is normally called a debenture.  A debenture must be registered with the Registrar of Companies within 21 days of its creation, as well as being registered against the land or the owner of the land.  The 21 days is a strict time limit and cannot be extended.  If the time limit is missed then the charge is likely to be invalid against creditors if the company later becomes insolvent. 

Mortgages: Enforcement 

Before the Lender can enforce payment, the Borrower must normally have defaulted in some way.  However this is not always a requirement with general bank lending.  A bank may take a mortgage as general security “for all monies and liabilities” owing by the Borrower from time to time.  That may include loans, and overdrafts for a business.  Generally bank lending is “on demand” and the bank can call on the Borrower to repay all of the debts by giving him 30 days written notice.  Once that notice has expired the bank can take enforcement action.   

Typical domestic mortgages provide that the Lender will not take enforcement action as long as the Borrower pays the due instalments, typically every month.  Structured bank loans make similar provisions: if the Borrower maintains the payments then there is no default therefore no enforcement. 

Fixed and Floating Charges 

A fixed charge is a charge or mortgage over assets which are fixed, typically real estate and securities held by a company.  A floating charge on the other hand is a charge or mortgage over all the company’s assets and properties from time to time, including its book debts.   

A floating charge is said to crystallise, that is to become fixed, on the happening of certain events.  Those events are listed in the charge itself.  They will usually include default on making agreed payments to the bank, the commencement of any informal insolvency procedure and the giving of formal notice to repay by the bank.   

A fixed charge gives the holder priority over the claims of preferential creditors in an insolvency.  The holder of a floating charge does not have any such priority.   

Preferential creditors include claims by employees for arrears of salaries.  

For charges created after 15^th September 2003, Section 176A Insolvency Act 1986 provides that a proportion of an insolvent company’s assets are to be made available to the unsecured creditors in preference to floating charge holders.  The proportion, where the company’s assets exceed £10,000, is 50% of the first £10,000 and 20% of the balance.  There is a maximum share for unsecured creditors, in preference to floating charge holders, of £600,000. 

There have been a number of well known court decisions recently on the definition of a floating charge.  Traditionally, banks attempted to give the term “fixed charge” a very wide definition so that it would include a charge over what are really floating assets, such as book debts.  The law has now been clarified by the decision of the House of Lords in the case of National Westminster Bank plc v Spectrum Plus Limited [2005] UK HL 41.  The House of Lords ruled that charges over book debts are normally classified as floating charges, not fixed charges.  One has to examine the way in which the customer can deal with the book debts in practice.  If he is to free to collect the debts and pay them into his bank account and draw on that account in the normal course of business, then the charge will be floating and not fixed.   

The main routes for enforcement which a bank will use include the appointment of an Administrator or Receiver, and taking possession of the land itself which is subject to the charge.   

An Administrator acts on behalf of the creditors as a whole.  However he has to respect and protect the rights of the bank in respect of any security which it holds.  The Administrator takes possession of the company’s property and attempts to save the company if that is possible.  Typically that is not possible and the Administrator will sell any assets to the highest bidder.  The bank will normally have first call on the assets, to the extent of its security. 

A Receiver, as opposed to an Administrator, is appointed to take possession of all the assets which are covered by the bank’s charge.  That may include real estate.  The Receiver will normally gather in the assets, sell them and account to the bank with the proceeds.   

Possession of Land and Possession Orders 

Taking possession of mortgaged land is the most obvious and direct remedy available to a bank.  Commonly the bank will seek possession as the first line of attack, and it may invite the Borrower to give up possession voluntarily so that the mortgaged property can be sold. 

If the Borrower does not agree to hand over possession, then the bank is almost certain to need a possession order, which it can seek in the local County Court for the area where the mortgaged property is.  The bank has no compulsory right of entry or right to dispossess the Borrower, with a possession order.   

In commercial cases the bank is very likely to obtain an immediate possession order.   

In domestic cases, typically a residential house mortgage, the bank may only obtain a suspended possession order, if the Borrower can show to the court that he can pay the current monthly instalments under the mortgage, plus a monthly sum which will clear the arrears under the mortgage over a reasonable period: typically 12 months.  If so the possession order is suspended on condition that the Borrower makes these payments.  If he fails to make the payments then the bank can proceed to enforce possession. 

Charging Orders 

Mortgages signed by the Borrower are not the only type of mortgage available to a creditor as an enforcement method.  The creditor who has a court judgment against the debtor, for payment of a sum of money, can enforce that judgment by obtaining a charging order against any land or securities, e.g. stocks and shares, which the debtor owns.  This is permitted by the Charging Orders Act 1979. 

To apply for a charging order in the County Court local to where the land is situated, the creditor must file a statement with the court proving that the debtor owns the land in question.  Normally one does this by obtaining a printout of the Land Register for the property.  The Register is open to public inspection.   

The creditor also gives details of the judgment in his favour and the fact that the debtor has failed to pay this.  The creditor asks the court to charge the land with payment of the judgment debt.   

The first part of the procedure is dealt with on paper by the local District Judge.  If the judge is satisfied then he grants the creditor an interim charging order, which charges the land with payment of the judgment debt, until a later date (usually about one month from the interim charging order) on which the debtor can appear before the court and argue any reasons why the interim order should not be made final.  

The creditor can register the interim charging order as soon as it is made, at the Land Registry.   

If the charging order is made final, then it ranks after any mortgages which are already registered against the property.  The creditor is normally entitled to interest at 8% on the judgment debt, under Section 69 County Courts Act 1984.   

It is possible to obtain a charging order against the beneficial interest of the debtor under a trust.  This will usually be the case where a husband and wife own the land jointly.  If the husband is the debtor then it is only his interest which is the subject of the charge by the judgment creditor.  

If a debtor has assets then a judgment followed by a charging order is very often the best and most effective form of enforcement.  

Protective Measures 

Sometimes the creditor needs to take very urgent action, to obtain security against the debtor’s land before he is able to sell it and remove the proceeds from the country, or otherwise spend the proceeds and put them beyond the creditor’s reach. 

For many years the English courts have been able to grant freezing injunctions (formerly called Mareva injunctions) in order to prevent the creditor’s claim, secure the creditors position in the short term by preventing the debtor from selling or removing his assets. 

The powers of the court are now set out in Part 25 Civil Procedure Rules 1998.  Specifically, the court may grant  

• An order for the detention, custody or preservation of relevant property
• A freezing injunction restraining a party from removing from the court’s jurisdiction assets located within the jurisdiction, or restraining the party from dealing with any assets whether they are located within the jurisdiction or not
• An order directing a party to provide information about the location of relevant property or assets.

The court has a discretion whether or not to grant an injunction of any sort.  The claimant must make full and frank disclosure and must come to the court with “clean hands”.  He must act promptly.  He has to disclose all the facts which are relevant, whether those facts support his case or the other party’s case. 

The court has to be satisfied as to certain conditions, before it can grant an injunction.  Those conditions are: - 

1. the applicant has established a serious issue to be tried
2. damages are not an adequate remedy
3. the balance of convenience lies in favour of granting an injunction: that is, the grant of the injunction will do more harm than good and
4. the applicant is able to compensate the respondent for any loss which the injunction may cause him in the event that it is later adjudged that the injunction ought not to have been granted.  That criterion was established in the House of Lords decision of American Cyanamid v Ethicon Limited [1975] (All ER 504).

It is important to remember that the court will always ask the applicant for an injunction to give an undertaking in damages, which is an undertaking to pay immediately any damages awarded by the court, if fit decides later that the judgment should not have been granted.  These undertakings are enforceable as solemn promises to the court, and the applicant would be in contempt of court and liable to a fine or imprisonment if he failed to honour his undertaking. 

The court is always concerned, in considering a freezing injunction, to see whether the applicant has established a real risk that the respondent will sell or dissipate its assets if not injunction is granted.  A recent High Court decision in the case of Albert Perry v Princess International Sales and Services Limited 2005EW HC 2042 illustrates the limitations on freezing injunctions.  This was an application for a freezing injunction against a company which owned a number of properties and which regularly mortgaged and dealt in property as part of its business.  The court emphasised that the purpose of a freezing order is not to compel the respondent to provide security for a claim, but to avert the risk that he will dissipate assets so as to frustrate the enforcement of any judgment.  The respondent should be allowed to deal with his assets, up to a stated value, so that if assets up to that value remain in his possession, the freezing order is not breached by disposing of other assets.  The respondent can always deal with or dispose of assets in the ordinary course of his business. 

Time Limits in Mortgage Claims 

Usually the bank will repossess and sell a mortgaged property quickly if the Borrower defaults on the payments.  Sometimes the value of the property is not sufficient to pay off the mortgage debt.  Many English banks bring proceedings against their Borrowers many years after that debt fell due for payment, in the hope that the borrowers will have acquired some property and assets in the intervening time.  

It has been established by a number of case, the most important of which is the House of Lords decision in West Bromwich Building Society v Wilkinson 2005 1WLR 2303, that the bank has 12 years to bring an action for the principle sum under the mortgage, where the mortgage was created by deed, which is nearly always the case.  The 12 years starts to run on the date when the right to receive the money accrued.  That is usually the date when the borrower first defaulted. 

In relation to interest, the bank has only six years from when the interest became due, in which to start court proceedings.  

The time limits start to run all over again, if during the initial period of 6 or 12 years the Borrower acknowledges in writing that he owes the debt.   

The fact that the bank has repossessed and sold the mortgaged property does not affect the operation of these time limits.  Banks need to be aware of the limits, and Borrowers also need to be aware as banks often try to recover these debts many years after the Borrowers have forgotten about them. 

European Enforcement Orders 

Under European Council Regulation 805/2004 it should be possible for uncontested judgments from other EU member states to be enforced in England directly.   

In practice the procedure for enforcing a judgment which has been certified as an EEO is much the same as under the Judgment Regulation EU 44-2001.  I have recently had direct experience of enforcing an EEO from a German court.  It is still necessary to register the foreign judgment with the High Court in London, which involves filing the judgment itself, a certified translation into English and certain other pieces of information together with a £50 fee.  The existence of the EEO only avoids the need to provide a detailed witness statement by the applicant for registration.   

Once the judgment has been registered the Creditor has to serve a notice of registration on the debtor.  The debtor must be given 28 days in which to appeal against the registration, or 56 days if the debtor is domiciled abroad.  

In practice these are real disadvantages and I take the view that this defeats the purpose of the EEO regulation.  However until such time as the UK is taken to court by the European Commission, I do not think this is likely to change. 

The court’s justification for insisting on registration is that English defendants normally claim they know nothing about the foreign proceedings and no nothing about the judgment.  The courts will therefore not allow direct enforcement of foreign judgments without some process of registration first.   

In view of the time delays after the notice of registration, in urgent cases it may still be necessary to apply for interim protective measures, such as a freezing injunction, against any property of the defendant, including land, which they defendant owns in England.  An injunction would protect the position until the EEO can be enforced against the land, for example by obtaining a charging order on the land. 

Important Notice 

Whilst the writer believes these notes to be accurate, they are a brief summary of some complex subjects.  Neither the writer nor Rix & Kay can accept responsibility for any accidental errors or omissions.  These notes are not a substitute for taking detailed legal advice on any actual case.