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What is an equitable mortgage

what is an equitable mortgage


S.2 Law of Property (Miscellaneous Provisions) Act 1989 ("LP(MP)A")

S.2 LP(MP)A sets out the requirements for the creation of contracts for the sale or other disposition of an interest in land. Broadly speaking, in order to be valid and enforceable, they must be in writing, contain all the terms the parties have agreed in one document (or, where contracts are exchanged, in each document) or by reference to other documents and be signed by or on behalf of all the parties to the contract.

Equitable charges

An equitable charge is created when property is expressly or constructively made liable, or specially appropriated to the discharge of a debt without there being any intention to transfer ownership of the property. In the event of non-payment of the debt, the creditor’s right of realisation is by judicial process i.e. by the appointment of a receiver or an order for sale.

S.53 Law of Property Act 1925

An equitable charge may be in writing (s.53(1)(c) Law of Property Act 1925) ("LPA") but is usually created by deed. Section 53(1) LPA requires a disposition of an equitable interest or trust subsisting at the time of the disposition to be in writing signed by the person making the disposition or by his agent or by will. An equitable charge can be created by express intention and terms.

Equitable mortgages

By contrast, an equitable mortgage of a legal estate arises where there is an agreement to create a legal mortgage or where there is an intention to create security but the formalities for the creation of a legal mortgage have not been complied with (for example it has not been created by deed or a charge in registered land has not been registered). An equitable mortgage is a contract that operates as a security and is enforceable under the equitable jurisdiction of the court. A proprietary interest in the debtor’s property is conferred, or undertaken in a binding manner to be conferred, by the debtor on the creditor.

Distinction between equitable mortgages and equitable Charges

There is a fundamental difference in the nature of an equitable charge and an equitable mortgage. The remedies available to the equitable mortgagee are more extensive than those available to the equitable chargee; in particular, an equitable chargee does not have the remedy of foreclosure. Older cases blurred the distinction between the two, but recent cases (for example, Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584) have tended to reinforce their differences. That case said that an equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer legal title in the property upon a mortgagee, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee. By contrast, an equitable charge which is not an equitable mortgage is created when property is appropriated to the discharge of a debt and confers on the chargee a right of realisation by judicial process (see above).

The conceptual difference between a charge and a mortgage is that, with a charge, although the land is appropriated as security for a debt, there is no conveyance to the lender. However, since 1925, it has not been possible to create a legal mortgage by means of a conveyance. Before the introduction of the Land Registration Act 2002 (the "LRA 2002"), a legal mortgage could be created by a demise (or sub-demise in the case of leasehold land) for a term of years, subject to a provision for cesser on redemption, or by a charge expressed to be by way of legal mortgage. Since the implementation of the LRA 2002 on 13th October, 2003, it has only been possible to create a legal mortgage using the second method. Unlike in the case of equitable mortgages and charges, the terms "mortgage" and "charge" in relation to legal mortgages of land have largely become interchangeable.

The case of Kinane v Mackie-Conteh [2004] EWHC 998 (Ch) has considered the relationship between s.53 LPA and s.2 LP(MP)A. Was the creation of an equitable charge a disposition which complied with s.53 LPA enforceable notwithstanding that it fell foul of s.2 LP(MP)A? The case concerned an equitable charge, not an equitable mortgage.

Mr Kinane lent money to Mr Mackie-Conteh for a trading venture. Mr Kinane alleged that Mr Mackie-Conteh entered into an agreement whereby he agreed to provide security for the loan by way of a legal charge over his home. The facts surrounding this alleged agreement were in dispute, but it was accepted that the agreement did not comply with s.2 LP(MP)A. Mr Kinane tried to enforce his security to recover the debt. He claimed that the agreement created an equitable charge over the property which was enforceable because it complied with s.53 (1)(c) LPA. As the equitable charge conferred no ownership or interest in kind but merely gave him certain rights over the house as security for the loan, it was enforceable. Mr Mackie-Conteh claimed that

the agreement did not comply with s.53(1)(c); s.53(l)(c) presupposed there to be an existing equitable interest in place capable of being disposed of, which there was not in this case.


The court held that the document was sufficient to create an equitable charge and was enforceable because it complied with s.53 LPA. As Fisher and Lightwood, the text book, says "An equitable charge on land or an interest in land must be in writing signed by the chargor or his agent. An instrument which creates an equitable charge and contains an agreement to create a legal mortgage, but fails to comply with the formalities for an equitable mortgage on land, will still create a valid equitable charge."

The court referred to the previous case of Murray v Guinness [1998]. In that case, the chargor executed a memorandum, not under seal, charging land with the repayment of a loan and undertaking to execute a legal mortgage in future. It was held that in so far as the document purported to create an equitable charge, it was valid; for the purposes of s.53(1)(c) LPA, the disposition was signed by the chargor and did not need to be signed by the chargee. However, in relation to that part of the agreement where the defendant agreed to enter into a legal mortgage, the agreement was a contractual obligation and accordingly should have been signed by both parties to be valid under s.2 LP(MP)A. The invalidity with regards to s.2 LP(MP)A did not strike down the whole document which was effective to create the equitable charge but not to impose the future obligation to create the legal mortgage. Furthermore, in that case, the document in question was creating an equitable charge which did not pre-exist. In Kinane. the court rejected the chargor’s claim that, for s.53 LPA to apply, there must be a pre-existing equitable interest for there to be a disposal protected by the LPA.

The court said that the definition of "Disposition" in s.205(1)(ii) LPA includes a conveyance and "conveyance" includes a mortgage or charge. Section 53 LPA relates to the requirements for the disposition of equitable interests and a disposition itself (rather than a contract for the disposition of an interest in land) does not need to comply with s.2. Accordingly, the agreement constituted an equitable charge, rather than an agreement to create an equitable charge, and needed to comply with s.53 LPA, not s.2 LP(MP)A. This part of the agreement was severable from the part which contained the obligation to create a legal mortgage. This obligation was void because it fell foul of s.2 LP(MP)A. Accordingly, no equitable mortgage had come into being.

It was clear that Mr Mackie-Conteh had consented to the charge on his property in favour of Mr Kinane to secure the loan and therefore the document was sufficient to create an equitable charge which was enforceable because it complied with s.53(1)(c) LPA.

From these cases, it appears that where a person signs an agreement with the intention of granting a charge over a property in future as security for a loan, the document may be construed as an equitable charge. If it is in writing and signed, it will be enforceable even though it would not be if treated as an agreement to grant a charge because of s.2 LP(MP)A.

As mentioned above, one of the ways an equitable mortgage can arise is where there is an agreement to create a legal mortgage. Such an agreement must comply with s.2 LP(MP)A. Before the LP(MP)A came into force (on 27th September, 1989), an equitable mortgage could be created where the debtor merely deposited the title deeds with the lender. Sometimes, a memorandum was signed recording the deposit and the terms agreed between the lender and borrower. Since the LP(MP)A came into force, it has not been possible to create an equitable mortgage by mere deposit. Deposit of title deeds is part performance of an agreement to create a legal mortgage and so the agreement must comply with s.2 LP(MP)A. In other words there must be some formal contract in writing which complies with s.2 in addition to the deposit of title deeds.

The case of De Serville v Argee Ltd [2001] also considered the interaction between s.2 LP(MP)A and s.53 LPA. In that case, a chargor deposited title deeds with a chargee. There was an exchange of letters but these were not sufficient to comply with s.2 LP(MP)A. Accordingly, there was no valid agreement to create a legal mortgage. However, the court said that the existence of one or more documents which govern the position between the parties (e.g. the letter in this case), could constitute an immediately effective disposition of property which complied with s.53(i)LPA, as opposed to an agreement to create security. The letters might be sufficient to create the charge, and not the act of deposit of title deeds itself. There was no need for the document to use the word "charge"; any form of words, which was apt to create an immediate security, would suffice. © Allen & Overy

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