General legal issues

Mortgages and charges

Mortgages and charges

One of the best ways of looking at a mortgage  (otherwise known as a “charge” which technically means something slightly different but the difference is negligible) is that it is like putting a property in a pawn shop.  Of course you cannot pick up a property and take it to a pawn shop, so instead it is given a label on the Land Register making it clear that someone else other than the registered proprietor has rights over the property.

The basic function of a mortgage is that it gives the mortgage lender the right to sell the property if mortgage conditions (including loan conditions) are breached, or to appoint a receiver to manage the property who might let the property, or dispose of it to meet any mortgage liabilities.

Mortgages are most commonly used to secure loans.  The terms of the loan may be included entirely in the mortgage or in a separate loan agreement, sometimes called a facility letter. The latter is common  if the amount of the loan or the terms of lending are complex or might change over time according to set criteria.

A commercial mortgage may be structured to secure any liability to the bank or other commercial lender, including liabilities that are not connected to the loan for which the mortgage was taken out.

Commercial mortgage lenders may sometimes request guarantees from trustees or employees of voluntary organisations.  As this creates personal liability for the individual, this request should be resisted and if it is maintained the organisation should seek alternative sources of funding. [Personal and limited liability]

Mortgages are often used to secure the performance of conditions in capital or even revenue grant agreements.  Usually if there is a failure in performance of the project for which the grant was provided, some or all of the grant will be repayable, with or without interest, or even a discount to reflect the passage of time.

A mortgage may extend not only to land but also other property and business of the party borrowing money, or taking the grant to which the mortgage relates.  Organisations should be wary of conditions that might restrict the use of property in a way that would make the project unviable (introducing restrictions on letting or sharing)  or the use of other assets such as intellectual property, or allow their exploitation by the lender or funder which will cause the organisations operational problems.

Mortgages will also commonly require the lender or funder’s consent to alter the property, obtain planning permission and share the property with others. If this is likely to be an issue, the lender or funder’s consent to future plans should be obtained when the mortgage is taken out, if possible. [Consents]

It is common for a mortgage to include provision for a restriction on the Land Register, which will prevent other mortgages without consent of the lender or funder.

If a registered or excepted charity wishes to take out a mortgage it must follow certain legal requirements.  [Charities Act mortgage procedure]