Legal charges and equitable charges are two different types of security interests over properties.
A legal charge is a security interest granted by the property owner to a lender over a specific property (whether residential or commercial).
The legal charge typically involves a formal legal process between the lender and the property and is registered with the Land Registry.
In the event of default on a loan, the lender has a first-ranking claim on the property, meaning they have a right to sell the property to recover the debt owed to them if they have a first legal charge.
It is possible for lenders to have second legal charges or even third or fourth legal charges over a property, as long as each lender is satisfied there is sufficient equity in the property to cover their respective loan.
In summary, Legal charges give the lender a higher level of security.
An equitable charge is a security interest that arises based on principles of equity and fairness rather than strict legal formalities.
Unlike legal charges, equitable charges are only registered with the land registry as a notice against the title – sometimes they are not registered at all.
Equitable charges do not give the lender an immediate right to sell the property in case of default. Instead, they give the lender an equitable interest in the property, which can be enforced through a court order.
With lending, the legal charge holders have to give consent for another legal charge over the same property. Consent is not required for an equitable charge. For this reason, some lenders will often take a view on equitable charges as security because consent to a second legal charge was declined or delayed, or where a property is leasehold and the lease contains a prohibition in connection with the creation of a legal charge over the lease, and they want to protect their position.
How can we help? At JPC we regularly deal with all forms of charges and we can offer advice on how to structure security to best protect your interests.