ARTICLE...
Can Charging Orders Bolster Security?
With the housing market in freefall and the UK set to head deeper into recession, lenders who are eager to recoup borrowing from small and medium sized businesses face a difficult decision - what action do they take against the residential property of a debtor or a guarantor?
Business lending is often secured through a second mortgage. But, with lending which was originally unsecured, a lender with a judgement can seek a charging order over a debtor's property.
However, the high loan to value percentage seen in house purchase transactions in recent years could mean there is very little equity left after the first mortgage.
Therefore, there might be no reward in enforcing security... and definitely no need to make the debtor homeless in the process.
This leaves lenders in a position with no prospect of repayment and no way to take positive action for several years.
A key issue is that Section 15 and 17 of the Limitation Act 1980 operate to eliminate the lender's title under a mortgage 12 years after the accrual of the cause of action for the claim of possession.
Whilst this can start afresh if part payments or even an acknowledgement is made, if nothing is forthcoming then a lender can lose its security by not taking action and allowing a debtor to keep their home until their circumstances improve.
Far from helping, this increases the likelihood of repossessions, creating an environment where lenders are compelled to take action and reclaim the debt.
However, it's not always that simple. 'Yorkshire Bank Finance Limited v Mulhall' is a good, contemporary demonstration of the advantage of a charging order granted by the court, as opposed to a mortgage.
Section 15 and 17 of the act do not apply as there is no right to repossession and, in the above case, the court of appeal agreed that a creditor is not precluded from enforcing a standing order - even after 12 years.
In essence, they could await repayment under the charging order from the eventual sale of the property.
So could this case change how lenders act? It definitely provides those with the benefit of charging orders a way of safeguarding their long-term interests, as well as enabling them to take a more sympathetic approach.
And even for lenders with mortgages, there is another way - bring a simple debt claim.
After the judgement, a lender could attempt enforcement, obtain a charging order and therefore retain their long-term flexibility. This charging order would take effect after a pre-existing and valid mortgage.
If the market improves sufficiently whilst the lender's mortgage remains, it would still be easier to enforce the mortgage. However, where a mortgage could be challenged under the act, the charging order would bolster the security.
While this case gives some much-welcome comfort in these hard times, it also grants greater flexibility in the way they can enforce in the future.
This is to be championed, especially in the current climate, where a lender's actions are subjected to intense public scrutiny and political comment.
Original article, by Rob Payne, courtesy of CCR. For further information visit www.ccrmagazine.co.uk
