Property Legal Charges explained

If you are borrowing money, it is common for a lender to require “security” over your property, in the form of a legal charge. While this is a normal part of secured lending, it can raise questions about what it means for you as a borrower and commercial property owner. In this back to basics guide, we explain what a property legal charge is, why lenders require one, and how it may affect you in practice.

Why does the lender require security over my property?

When you take out a loan, the lender will want comfort that it can recover the loan if it is not repaid in accordance with its terms. Taking a legal charge over your property provides that protection by giving the lender certain rights over your property.

If you, as the borrower, are unable to meet the loan repayments, the lender has the right to step in, take possession of your property and sell it, using the sale proceeds to repay the outstanding loan balance. This is known as ‘secured lending’.

Will the lender carry out checks on my property before taking a legal charge?

Yes. Before agreeing to take a legal charge, the lender will carry out a number of checks, commonly known as ‘due diligence’. These checks usually include reviewing the property’s title register at the Land Registry and carrying out property searches, such as local authority, environmental and drainage and water searches.

The title register is the official record of the property held at the Land Registry and confirms who owns the property, as well as setting out any rights, restrictions or existing charges affecting it. The results of any property searches will provide further information about the property, including the planning history, potential environmental risks and details of access and service connections.

The purpose of these checks is to ensure that the property has what is known as “good and marketable title” – in other words, that the property could be sold without difficultly if the lender ever needed to enforce the legal charge.

If your property is leasehold, the lender will usually have additional requirements. In particular, lenders will consider how long remains on the lease and will usually require a sufficiently long term (often at least 10 years), as anything shorter can reduce the property’s value. The lender will also check whether the terms of the lease allow the property to be charged, as some leases restrict this or require the landlord’s consent. It is therefore important to review the lease as early as possible so that any required consents can be obtained promptly.

Will a legal charge affect how I use my property?

In day to day terms, you are unlikely to notice much difference once the legal charge is in place. However, the legal charge will include certain restrictions that you, as the borrower, must comply with.

These restrictions usually prevent you from selling the property or granting rights to third parties (such as leases) without the lender’s consent, as these types of changes could reduce the property’s value or affect the lender’s security.

Once the legal charge is completed, it must be registered at the Land Registry in order to take legal effect. This registration confirms that the property is subject to a legal charge and identifies the lender. The lender will also place a restriction on the title register to prevent ‘dispositions’ being made to the title (such as a transfer of the property or the grant of a lease) without their consent.

If you decide to sell the property, the loan will usually need to be repaid in full on completion. Buyers will expect to purchase the property free from any legal charge, otherwise, they would take the property subject to the lender’s rights.

You will also give certain undertakings (in other words, promises) to the lender, such as keeping the property in good repair. You will also need to keep the property insured for its full reinstatement value and your lender might ask for their interest to be noted on the insurance policy.

Does a legal charge prevent me from taking out further borrowing?

Not necessarily. If you want to take out further borrowing and another lender wants to take security over the same property, you will usually need the consent of the existing lender.

In these situations, the lenders may enter into a deed of priority, which sets out the order in which the lenders will be repaid if they have to enforce their security and sell the property.

I have heard some loans require improvements to a property’s EPC rating, why is that?

Some loans do include obligations relating to Energy Performance Certificate (EPC) targets or energy efficiency improvements. This is known as “green financing” which is designed to encourage more environmentally friendly activity.

Green financing plays an important role in helping businesses work towards net zero and reduce their environmental impact. Improving the energy efficiency of a property can be costly, so these types of loans often include incentives to help offset the expense.

For example, your loan may require you to carry out specified works to improve the property’s EPC rating by a certain date and in return, your lender may offer incentives such as a reduced interest rate once those improvements have been completed.

I have re-paid the loan – how do I remove the legal charge from my title register?

Once the loan has been repaid in full, the legal charge can be discharged. The restriction and legal charge noted on your title register will need to be removed using a form called a DS1 which is submitted at the Land Registry. The lender may submit this at the Land Registry directly, or your solicitor can deal with the discharge process on your behalf and ensure that the title register is correctly updated.

How can we help

Before entering into a legal charge, it is important to understand both the restrictions its places on you as the borrower and the rights it gives to your lender. Taking legal advice early can help avoid unexpected issues later on.

We can assist at all stages of the process – from advising you before you enter into a legal charge to dealing with its discharge once the loan has been repaid. Please do get in touch if you would like our help with any of the above.