While it is possible to mortgage part of a title, we would usually advise against this due to the potential risks for a lender in the event of a default by the borrower.
The risks are easier to explain with an example:
- B owns a house with a large garden
- B obtains planning permission to build a second house in the garden
- Access for both properties to the main road will be shared
- B requires a loan from C to fund the development and C requires a mortgage over the land being developed.
The issue here is that if B defaults on the loan and C takes enforcement action by exercising its power of sale or taking possession of the land, the land does not benefit from a right of way over the shared access. A right of way cannot be granted simultaneously with the mortgage as the house and the land will be in the same ownership and the land benefitting from and subject to an easement must be owned by different entities. This is known as the “unity of seisin”.
It is also not possible for B to grant C a right of way over the shared access simultaneously with the mortgage, as an easement must benefit land and not a particular person or lender.
Where there is no default under the loan, there are no practical consequences of a mortgage of part. However, if a lender exercised its power of sale, the mortgaged land would need to be sold without the benefit of any rights over the remaining land. This is likely to have a huge effect on the value of the land being sold, and therefore the ability of the lender to recover the sums owed.
The most straightforward, and safest solutions are:
- To take a mortgage over the whole title. This can have practical implications on the Borrower’s ability to deal with the remaining land.
- Transfer one part of the land (either the “benefitting” or “burdened” land) out of the title. This transfer must be to a different entity to avoid the properties being in the same ownership.
On the basis of the example above, B could transfer the land into joint names with another person or to a company set up specifically for this purpose. In this transfer, any necessary rights could be granted and reserved in the event that the lender needed to sell the charged area. The properties would need to remain in separate ownership for the duration of the mortgage, as by transferring the properties back into the same ownership, the rights would come to an end.
A transfer may have tax implications for the landowner and so the borrower should speak to their accountant to ensure that this is a cost-effective solution. Lenders should be extremely wary when asked to take a mortgage of part and should take legal advice before proceeding.
For further information or guidance, contact commercial property Partner, Kate Burlinson, on 0116 402 9022 or email email@example.com.