| Leasehold premises | Charge by deed expressed to be by way of legal mortgage (must be by deed 52 LPA 1925) 87 LPA 1925 mortgage does not transfer ownership of the property (unlike mortgages over non-real estate assets) however the mortgage gives the lender rights equivalent to a lease of one day less than the duration of the borrower’s lease Is it worth the lender taking security over leasehold premises? Consider how long is left before expiration of the lease (longer the lease the more valuable) How much is being paid for the lease and what is the market value? If borrower is paying below market value for the lease it is a valuable item for security because the lender will be obtaining it for less than market value (and would therefore be able to make a profit selling the lease on) If borrower is paying market rate or above, is not worth taking security over as bank would not make a profit when selling it on because the bank will not be able to sell it on at a premium Limitations on assignment/charging – will need to know whether the lease contains restrictions on assignment/charging (if so will need to obtain LL’s consent) | Check whether consent is required under the lease -
860(7)(a) Registration at Companies House is compulsory – Form MG01 870(1)(a) must register within 21 days of creation 27 LRA 2002 Registration at land registry within 30 working days as a notice on the charges register 48 LRA 2002 Date of registration determines priority |
| Freehold Premises | Charge by deed expressed to be by way of legal mortgage (must be by deed 52 LPA 1925) 87 LPA 1925 mortgage does not transfer ownership of the property (unlike mortgages over non-real estate assets) however the mortgage gives the lender rights equivalent to a lease of one day less than the duration of the borrower’s lease If there is a pre-existing mortgage on the premises then new lender should negotiate a subordination/inter-creditor agreement with the existing mortgagee | Check whether consent is required under the lease -
860(7)(a) Registration at Companies House is compulsory – Form MG01 870(1)(a) must register within 21 days of creation 27 LRA 2002 Registration at land registry within 30 working days as a notice on the charges register 48 LRA 2002 Date of registration determines priority |
| Supply Contracts | Assignment Assignment involves the transfer of a property interest from the borrower to the lender. That property interest is typically the borrower’s rights against a 3rd party under a contract e.g. the right to receive an income stream from a contract Assignment is equivalent to a mortgage (i.e. transfers legal title) over intangible assets (contracts, goodwill etc) Assignment does not require borrower’s consent Always check whether there is a prohibition in the contract on assignment Legal Assignment (for lucrative and small number of contracts) If Borrower assigns contract to lender and lender then fails to give notice to 3rd party and borrower later assigns the contract to another assignee, that later assignee will gain priority over the original lender if the subsequent assignee notifies the 3rd party 3rd party has notice of the assignment because the 3rd party must be alerted to the fact that he must, in future, make payments to the lender rather than the borrower. The problems with legal assignment are that The borrower may not want the 3rd parties to be altered to the fact that he is refinancing Where there are many contracts there will be an administrative burden of alerting all the 3rd parties Advantages of legal assignment The lender has priority over equitable assignment The lender can sue the 3rd party directly rather than having to join the borrower in an action Equitable Assignment (for lots of contracts but low value or for future contracts) This is an assignment which does not fulfil one or more of the conditions for a legal assignment (just need intent to assign). Under equitable assignment the borrower continues to receive the money from the 3rd party and then passes it on to the lender Advantages of equitable assignment Disadvantage of equitable assignment The 3rd party who owes the borrower money will get good discharge of his debt by paying it to the borrower instead of the lender ‘Set off’ – the debt is taken subject to accruing equities. E.g. if the 3rd party who owes money to the borrower is also the creditor of the lender (has money in a bank account with the lender) the 3rd party is entitled to set off what the bank owes to them against what they owe to the borrower An equitable assignment does NOT grant the original lender to whom the contract was assigned, priority over subsequent lender who are assigned the contract For the original lender to gain some protection, could register it. This would give equitable assignee some protection, because if subsequent assignee purports to gain priority by notifying 3rd party, he would not succeed if, on inspection of the Registrar, he finds that there has already been a previous assignment Lender will have to join the borrower in an action in order to sue the 3rd party (unlike the position with a legal assignment) | 136 LPA 1925 Assignment must transfer the whole of the value of the contract (i.e. must assign everything it’s owed under the contract) Rights to be ascertained must be wholly ascertainable and must not relate to part only of the debt Must be in writing and signed by assignor (borrower) Actual notice of the assignment must be received by the 3rd party for the assignment to take effect Register at Companies House because of book debts Register at Companies House because of book debts |
| Book Debts | Fixed Charge Advantages of fixed charge Fixed charge is a stronger right than floating charge on insolvency of the borrower Fixed charge – ranked just after administrators’ costs, but before preferential creditors Floating charge – ranked after preferential creditors and ring-fenced amount reserved for unsecured creditors Disadvantages of fixed charge: Administrative inconvenience – Following Spectrum - It remains possible to take a fixed charge over book debt – but must show that the lender has sufficient control over both the book debts and their proceeds. It’s not clear what the requisite degree of control is. To show sufficient control - Bank will have to channel proceeds of book debts into a particular account, and will have to keep giving consent to borrower every time borrower wants to withdraw from that account Floating charge Does not prevent borrower from dealing in book debts during ordinary course of business But if co. defaults, floating charge crystallises, thus preventing co. from dealing in book debts Bank then has the right to the income coming in from customers to satisfy its debt due under the loan Advantages of floating charge The borrower is able to use the book debts in the ordinary course of business (unlike a fixed charge) Disadvantages of floating charge Legal & Equitable Assignment Will give the bank a right to get income from customers of the borrower Disadvantages Borrower would have had to grant multiple legal assignments to book debts – administrative inconvenience of informing third party clients. Assignment gives no right to appoint a liquidator or administrator if the borrower becomes insolvent. On insolvency, fixed and floating charges would rank ahead of the assignment. Conclusion: for these reasons, assignment is not ideal. A charge is the better option | -
860(7)(f) Registration at Companies House 870(1)(a) within 21 days On insolvency if charge is not registered it will be void against a liquidator Priority is by date of creation provided registered within the time limit Priority over floating charge -
860(7)(f) & (g) Registration at Companies House 870(1)(a) within 21 days On insolvency, if not registered, floating charge will be void against the liquidator Priority from date of creation, provided registered within the time limit. An earlier floating charge will take priority even if a later one has crystallised 136 LPA formalities & Registration at Companies House under 860(7)(f) Gain priority by notifying 3rd party before subsequent assignee, so long as lender does not already know of previous assignment |
| Equipment expected to be obsolete after 5 years | Fixed Charge Not so practical as will require company asking permission if it wishes to dispose of equipment Floating Charge | 860(7)(b) Registration at Companies House within 21 days 860(7)(g) Registration at Companies House within 21 days Bank consider taking negative pledge |
