The Case

Greenhalgh Kerr recently acted for a finance client seeking to recover a debt arising from a terminated commercial loan agreement. The client’s exposure was sizeable and they were all too wary of other creditors seeking similar relief.

In order to move swiftly, the debtor company was served with a statutory demand. As a result, they engaged in discussions which resulted in them offering a legal charge over their property by way of security, with payment to be made by instalments thereafter.

There was a sufficient level of equity in the property and possession could be sought so as to realise the indebtedness in the event of default. The charge also meant that the finance client would be treated as a secured creditor in the event of another creditor presenting a successful insolvency action.

In such scenarios, it is our practice to lodge an official search with priority (an ‘OS1’) with HM Land Registry. This ensured that a priority period is afforded whilst the legal charge was prepared. In addition, we lodged an application enquiry.

The application enquiry revealed that the debtor, despite having just offered the legal charge, had subsequently sought to transfer 50% of their interest in the property to their partner and chose not to disclose this.

Had this proceeded, the finance client’s security would have effectively been halved and it could have been open to the beneficiary of the disposition to argue that their new interest overreached the finance client’s security.

This gave grounds to unwind the settlement agreement given the legal charge had been based on a misrepresentation. However, the finance client was, understandably, still keen for there to be a settlement which saw them secured.

Greenhalgh Kerr withdrew from the settlement and reopened negotiations, albeit this time, taking a more firm stance. The debtor was informed that their conduct had caused a loss in good faith and because the settlement was voided, it was the finance company’s intention to move forward with insolvency proceedings (the statutory demand now having expired and not been set aside).

This prompted the debtor to pay the debt of £70,000 in full and of course made a client very happy.

Takeaway Points:

• We understand the Law of Property Act 1925 and the Land Registration Act 2002 and its scope when dealing with obtaining and registering legal charges

• The Land Registration Act 2002 allows a mortgagee to register a legal charge against the legal and beneficial interest in a property. We negotiated for legal charges to be granted to our client within the settlement terms to protect their exposure.

• Under the Law of Property Act 1925, when a property is subject to a mortgage, the mortgagee’s interest is vulnerable to being overreached if certain conditions are met.

• Above all, we make use of the search and application options available with HM Land Registry.