Mortgages and charges, and the different types of mortgages and charges can be confusing for many small business owners.


There is a significant legal difference between a mortgage of a registered property and an unregistered property (the latter is registered in the registry of deeds, the former is registered In the Land Registry)

The difference in reality is that a registered property is ‘charged’ ie a charge is registered on the property at Land Registry on the property but no formal transfer of ownership takes place.

An unregistered property is actually conveyed, assigned or leased by the borrower to the lending institution subject to the borrower’s right to redeem(pay off) the loan in the property. But title formally passes to the lending institution under the mortgage deed.

The Mortgage Deed

This document states that the lender has made a loan available to the borrower and the borrower guarantees to repay the loan by securing the loan against the property.

The mortgage deed will also contain a number of other covenants as a matter of course including

* A covenant to the effect that the property must be used as the borrower’s principal private residence
* A covenant to not carry out any development on the property without the consent in writing of the lender
* A covenant to insure the property and the interest of the lender noted on the policy.

It is important to bear in mind that these are standard covenants in mortgages with the main banks; it is crucial to read or have a legal professional read the additional covenants if dealing with a sub-prime lender or a smaller financial institution.

Types of Mortgage

1. Principal Sums

This mortgage is for a fixed sum; it is less used in practice now as most banks will issue ‘all sums due’ mortgages.

2. All sums due

There is generally an all sums due clause in most mortgages now and this has a significant impact on a person’s finances if they do not know what it means.

It means essentially that the borrower is pledging their property not just for the property in question but for ALL indebtedness to the bank, now or in the future.(credit card, car loan etc.) This is obviously of huge importance as many people will spread their financial exposure between various banks in an attempt to create a wall between different loans but this clause means the bank can use the house as security for all borrowing.

Foreclosure

This procedure is rare in Ireland and involves the bank taking court proceedings to have the borrower’s interest wiped out and the bank becoming owner. The banks do not want to own houses in Ireland as they invariably attempt to obtain possession to sell the property.

Court order for possession and then sale

This is more common in Ireland and the bank has the power to sell the property without going to court.

However they will be unable to sell without vacant possession so they will go to court to obtain an order for possession.

Receiver

If the property is commercial the bank will appoint a receiver on foot of their mortgage and his duty will be to receive any rents due and pay them towards the mortgage and to manage the property with a view to an ultimate sale.