What is an Equitable Charge?
An equitable charge is a form of security interest used to secure a loan against property, much like a legal charge. However, unlike a legal charge, an equitable charge does not require the consent of the first charge lender in order for it to be lodged against the title of a property at the land registry.
The Legal Framework of Equitable Charges
An equitable charge is not a legal charge, it creates an equitable interest in a property, whereas a legal charge creates an legal estate (or interest) in a property. Lenders often opt for an equitable charge, using their standard form of legal charge, because they are unable to meet the formalities of registering a full legal charge at HM Land Registry. The most common scenario we find is that there is already a first ranking legal charge on the title to the property and to secure a second ranking legal charge you would need to obtain ‘consent’ from the first ranking charge holder. As an equitable charge is a notice on the title, the first ranking legal charge holder’s consent is not required.
Just like a standard second charge loan, An equitable charge secured by way of loan agreement and a deed. The difference being that instead of thel loan being secured by a legal charge, its secured via an AN1 (agreed notice on the title) and an RX1 (restriction on the title). Similar to the way that a legal charge works, a restriction on the title of a property will prohibit the property from being transferred or sold.
Advantages and Disadvantages of Equitable Charges
Equitable charges offer both advantages and drawbacks for both borrowers and lenders. It’s important to carefully consider these before using them as a means of securing a loan.
Advantages:
- Flexibility: They provide access to property equity when conventional second charge loans are not an option, allowing borrowers to raise funds without disturbing a first legal charge.
- No need for lender consent: Equitable charges don’t require permission from the first charge lender, making them ideal in cases where the primary lender refuses second charge consent.
Disadvantages:
- Enforcement complexities: Lenders have watered down possession rights. Where lenders are able to instruct receivers, they will have diminished powers, and in some cases, lenders may instead have to obtain a possession order via the courts to enforce the charge, adding legal costs and delays.
- Higher interest rates: Due to the increased risk for lenders, equitable charges often come with higher interest rates compared to second legal charges.
- Potential Breach of Contract some mortgage agreements will have a clause that prohibits the borrower from securing additional lending against the a property without consent, meaning that the borrower could be in breach of contract by taking out an equitable charge loan.
When to Consider an Equitable Charge:
- If you’re unable to secure a second legal charge due to the first lender’s refusal.
- If you need flexibility in accessing property equity quickly without disrupting existing financing arrangements.
Practical Applications of Equitable Charges
Increasingly, borrowers are finding themselves in a position where they have, over time, built up a large amount of equity in a property portfolio or main residence. They may want to access that equity for a number of reasons. Perhaps to fund a cash injection into their business, or to use the equity towards funding the deposit for another property purchase.
Equitable charges are particularly valuable in specific situations where flexibility is key. For example, many property investors prefer equitable charges when:
- They need quick access to capital for new property acquisitions or business investments.
- Refinancing the first charge debt would incur early repayment charges, making it financially unviable.
- First charge lenders, such as banks or high street lenders, outright refuse to grant second charge consent.
Equitable charges can be a lifeline in these cases, providing a practical alternative, but it’s important to understand the higher costs and the risks involved.
FAQ
Most frequent questions and answers
Mark Allan partner at Seddons LLP says:
Yes, an equitable charge will be ‘noted’ against the title of your property within the charges register, however it will not be expressly stated as a legal charge. Given the current back logs at the land registry, it may take up to 12 months for for the equitable interest to appear on the title of the property.
If the charge was resisted by way of restriction on the property, no, if by Agreed notice or unilateral notice, then yes, but it will transfer to the new owner if not resolved before the sale. A key consideration here is that Most prospective buyers would not purchase a property that came with greed notice or unilateral notice attached to the title, and mortgage lenders alike would not lend against the property unless this was removed.
Mark Allan head of litigation at Seddons LLP says:
A lender with the benefit of an equitable charge that is made by deed and expressed by way of legal mortgage but is not completed by registration has a statutory power of sale, with the sale overriding all rights over which the charge has priority. This is the position adopted by the Land Registry. Also, an equitable charge holder may appoint fixed charge receivers if the same conditions are met and if it has an express power to do so under its security document (failing which it has a statutory power to appoint, although statutory appointed receivers typically have less powers).
Enforcing an equitable charge requires careful consideration and lenders with the benefit of an equitable charge would be wise to seek legal advice before taking enforcement action. Solicitors are well placed to carry out a review of the security and advise lenders as to the enforceability of its security. Solicitors can also provide advice on overall strategy.”
Lenders take on more risk with equitable charges, as they often cannot enforce the loan as quickly or easily as they could with a legal charge. This higher risk translates into higher interest rates.
Typically, LTV ratios for residential properties go up to 65%, while commercial properties usually cap at 60%.
Yes, an equitable charge will be ‘noted’ against the title of your property within the charges register, however it will not be expressly stated as a legal charge.