Equitable Charge vs. Legal Charge
What's the Difference?
Equitable charge and legal charge are both types of security interests that can be placed on a property to secure a debt. However, there are some key differences between the two. A legal charge is a formal legal document that gives the lender a right to take possession of the property if the borrower defaults on the loan. On the other hand, an equitable charge is a more informal arrangement that gives the lender an interest in the property, but does not give them the right to take possession. In general, legal charges offer more protection to the lender, while equitable charges are more flexible and can be easier to set up.
Comparison
| Attribute | Equitable Charge | Legal Charge |
|---|---|---|
| Creation | Created by an agreement between the parties | Created by a legal mortgage deed |
| Priority | May have lower priority compared to legal charges | Generally has higher priority compared to equitable charges |
| Enforcement | Enforced through court of equity | Enforced through court of law |
| Registration | Not required to be registered | Must be registered with the Land Registry |
Further Detail
Definition
An equitable charge is a form of security interest that gives the lender the right to take possession of the property if the borrower defaults on the loan. It is created by an agreement between the lender and the borrower, typically through a mortgage or deed of trust. On the other hand, a legal charge is a type of security interest that gives the lender a legal right over the property. It is created by a legal document, such as a mortgage deed, and is registered with the Land Registry.
Creation
Equitable charges are created through an agreement between the lender and the borrower, without the need for registration with any government agency. This makes them easier and quicker to set up compared to legal charges, which require registration with the Land Registry. Legal charges, on the other hand, must be created through a formal legal document, such as a mortgage deed, and must be registered with the Land Registry to be valid and enforceable.
Priority
When it comes to priority, legal charges generally take precedence over equitable charges. This means that if a property is sold to repay debts, the proceeds will first go towards satisfying the legal charge before the equitable charge. This is because legal charges are registered with the Land Registry, giving them priority over unregistered equitable charges. However, if there are multiple legal charges on a property, the order of priority will be determined by the date of registration.
Enforcement
Legal charges are easier to enforce compared to equitable charges. This is because legal charges are registered with the Land Registry, making it easier for the lender to take possession of the property in the event of default. On the other hand, enforcing an equitable charge can be more complex and time-consuming, as it may require a court order to take possession of the property. Additionally, equitable charges are subject to the equitable principles of fairness and good faith, which can further complicate the enforcement process.
Protection
Legal charges offer more protection to lenders compared to equitable charges. This is because legal charges are registered with the Land Registry, providing a public record of the lender's interest in the property. This makes it easier for other creditors or potential buyers to see the lender's claim on the property. On the other hand, equitable charges are not registered with any government agency, making it harder for third parties to know about the lender's interest in the property. This lack of visibility can make it riskier for lenders to rely solely on equitable charges for security.
Flexibility
Equitable charges offer more flexibility to borrowers compared to legal charges. This is because equitable charges are created through a private agreement between the lender and the borrower, allowing them to negotiate the terms of the charge. This flexibility can be beneficial for borrowers who may need more lenient terms or repayment options. On the other hand, legal charges are more rigid in their terms and conditions, as they are governed by specific legal requirements and must be registered with the Land Registry to be valid.
Conclusion
In conclusion, equitable charges and legal charges have their own unique attributes and advantages. Equitable charges are easier to set up and offer more flexibility to borrowers, but they are also harder to enforce and provide less protection to lenders. On the other hand, legal charges are more secure and easier to enforce, but they are also more rigid in their terms and conditions. Ultimately, the choice between an equitable charge and a legal charge will depend on the specific needs and circumstances of the lender and borrower.
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