So you have a charging order – what now?
Charging orders are a useful way to secure a debt by imposing a charge over a debtor’s beneficial interest in land (securities or other assets). A charging order is a court order applied for by a creditor and the procedure to obtain one is relatively simple but there are a few points worth remembering:
- a charging order is only as good as the available equity in the property;
- where the debt is in the name of one of the co-owners of the property, the charge will only attach to that person’s interest. Charging orders work most effectively to recover a debt where there is enough equity and there is a sole owner, this is the simplest scenario;
- the date of the interim charging order determines the priority of the charge in relation to other charges and so creditors should get their interim charge registered as soon as possible; and
- it is possible to obtain a charging order against a party with a beneficial interest eg a trustee where there is evidential link between property and beneficiary.
If the land is unregistered the creditor should register a pending action and this should be followed up with a writ or order affecting land when the interim charging order is made.
An application to register a caution against first registration should also be made at this time.
The manner in which a charging order is registered may seem straightforward but it is necessary to understand the practical effect a charge (interim or final order) has on the title when it is registered. A charge can be registered by way of a notice or a restriction.
The equitable charge attaches to the net sale proceeds rather than the land. Whereas, a legal charge creates an interest in the land which is capable of binding future owners of a property and has a power of sale, subject to pre-action protocol steps being taken by the charge holder. A legal charge is typically created by a mortgage or other deed. The manner of registration depends on whether the debtor is the sole owner or joint owner. A notice (agreed or unilateral) creates a charge on the legal estate and the restriction creates a charge on the beneficial interest under a trust for land. The advantage of notices and restrictions are that both can be registered without the debtor’s consent.
A unilateral notice will not prevent a sale but will ensure (once registered) that the beneficiary receives notice of any disposition. Unilateral notices are available where the judgement debtor is the sole registered owner. A creditor can also register a unilateral notice against two or more judgement debtors if they are the joint property owners.
When the debtor / vendor wishes to sell the property there will typically be a series of communications between the vendor and the creditor’s solicitors in which the creditor seeks information about the level of equity held in the property and whether there will be sufficient proceeds of sale to satisfy the judgement debt. Assuming there is sufficient equity then it follows that the creditor will be paid. If not, the mortgagee will be paid first together with any other secured creditors which have been registered before the creditor’s charging order. If there is insufficient equity to pay all creditors, some of the other secured creditors may not be paid. When the property is sold and the creditor is paid, arrangements can then be made to remove the notice on the title.
An example of the standard wording of the unilateral notice is as follows:
(22.01.2004) Unilateral Notice in respect of an Interim Charging Order dated 15 October 2003 made between (1) [ ] and [ ]
(22.01.2004) Beneficiary: [Name and address]
This type of notice is no more effective than a restriction as discussed below.
This type of notice is used when a co-owner’s beneficial interest is involved and where one of two joint owners is holding the property with his co-owner, in trust. This will not necessarily prevent the creditor applying for an order for sale, but the court will take the other co-owner’s circumstances into account when exercising discretion to make an order.
The standard form of Land Registry restriction which applies to charging orders can be found on the Land Registry website (practice guide 76). Form K is the standard form of restriction. The standard form of wording for a restriction under form K is as follows:
No disposition of the registered estate other than a disposition by the proprietor of any registered charge registered before the entry of this restriction, is to be registered without a certificate signed by the applicant for registration or their conveyancer that written notice of the disposition was given to the [Creditor’s name and address] being the person with the benefit of the [interim/final] charging order on the beneficial interest of [enter debtor’s name] made by the County Court at [ ] on [ date ] [court ref ].
The practical effect of this type of restriction is that the purchaser of the property must give notice of the transfer to the creditor with the benefit of the charging order and then send to the Land Registry a certificate that this has been done. The problem with this loose form of wording is that the notice can be given after the transfer has taken place (but before registration of it at Land Registry) and this can be after the proceeds of sale have passed into the hands of the judgement debtor.
Clearly this form of restriction is open to abuse. What can be done about it? A creditor can, at final charging order stage, ask the court to approve a non-standard form of wording under S46 of the LRA 2002, for a form K restriction. The effect of the non-standard wording will be to require certification by an applicant 14 days before the transfer, rather than at an unspecified date as in the standard wording. This will give the creditor time to consider what it wants to do to protect its position eg ask the judgement debtor for an undertaking that it will discharge the debt (or some of it) out of the proceeds of sale.
The Land Registry will be inclined to adhere to their standard wording and will query why the creditor is using a non-standard form of wording. In that event they may reject the application with the effect that the creditor has to start all over again and possibly go back to court to seek an amendment of the form K wording. In the meantime, the creditor’s interest is not registered. One way to avoid this is to get the non-standard wording approved by the Land Registry before asking the court for the non-standard wording.