Synthesis Of Legal Frameworks Governing Real Estate Investment In The United Kingdom
| Author: |
Xiaoyang Zhang
Lecturer of Business Law, The Open University of Hong Kong
|
| Issue: |
Volume 6, Number 1 (March 1999)
|
Contents
-
The practice of real estate business in the UK has its unique characteristics. The basic principles relating to property matters
in England and Wales can mainly be discovered from the body of legislation passed in 1925, among which the Law of Property Act 1925
(L.P.A. 1925) is the most important. The 1925 property legislation has been amended and/or superseded by later statutes which also
have a profound effect upon today's practical issues.
-
In the context of L.P.A. 1925, real estate refers to land. The specific meaning of "land" throughout the Act includes not only the
soil and things beneath it, but buildings on it as well as rights with respect to land which have no physical existence (section
205(1)(ix)). Since real estate is tangible but immovable, it is not possible to deliver land and buildings in the same way as would
be the case with movable commodities. The significance of real estate business lies in dealing in the property owner's rights and
interests relating to the estate. That is to say, an estate owner is entitled not only to the exclusive right of occupying the physical
units of land, but more importantly to all the legal rights and interests over land and buildings.
-
Land tenure is the period of time for which the land is held and during which the land owner has the exclusive right to possess the
land and enjoy the interests connected therewith. The types of land tenure fall into two categories - freehold and leasehold. According
to section 1(1), the only estates and interests in land which are capable of subsisting or of being conveyed or created at law are
- a) an estate in fee simple absolute in possession and b) a term of years absolute, which correspond to the common terms of "freehold"
and "leasehold".
-
In the UK, there is no such thing as absolute private ownership of land, and nominally all land is held of the Crown.[1] In reality, however, most land exists in the form of private ownership. Perpetual ownership is available by becoming freeholder
in possession of land. And a land tenure in the form of freehold is the nearest equivalent to absolute ownership. However, although
freehold as the fee simple absolute in possession is the highest form of land tenure under the Crown, it is still the nearest to
absolute ownership, albeit not absolute ownership in real terms.
-
Whilst in principle a freeholder may do as he likes with the land, in practice he is still subject to certain restrictions, some
imposed by the statute and some under certain inalienable rights.[2] Firstly, while a freeholder may have leased interests in whole or parts of his estate, the statutory protection of tenants restricts
the freeholder's rights to do what he likes, and he has to comply with the ground rules established by the legislation governing
the way freeholders and their tenants should behave to each other. Secondly, for the benefit of the public in general, some restrictions
are also imposed by statute in regard of town and country planning and the environment in general. A freeholder may not be able
to carry out any development scheme on his land unless he receives the consent from the relevant planning authorities. Thirdly,
third party rights may exist over the property. And finally, under extreme circumstances, compulsory purchase of land might be carried
out by the government.
-
In contrast to freehold, leasehold as the other form of land tenure is limited in time. The origin of leasehold lies in the freeholder's
creation of a lesser interest over his land. A freeholder may rent the premises he owns to somebody else by giving a lease for a
fixed period of time in return for a rent.
-
In theory, there can be any number of leasehold interests existing over the same piece of land. Similar to a freeholder who may
create a leasehold interest conferring on the tenant the right to possess and use the property for a specific period, the tenant
may in turn create a subsidiary lease by disposing of his right to occupy and use the property, and letting the property to a third
party.[3] Thus it is likely that various forms of land tenure may exist over a single unit of land at the same time.
-
An investor may have investment interests in three major aspects: a) tenure interests; b) financial interests; and c) anti-inflation
interests.
-
An interest in real estate represents an interest in land of defined duration. Thus, freehold and leasehold interests constitute
a crucial aspect of investment interests - tenure interests.
Freehold interests
Freehold interests are perpetual interests. They play an important role in fulfilling the investor's goal of preserving or increasing
the real value of the property. Also, the investor, as a freeholder, may grant a lease to one tenant or more for the purpose of
receiving a flow of profit by acquiring a substantial rental income over time. However, for all freehold investments, costs will
almost inevitably be incurred in the course of purchase, on-going ownership and/or eventual sale of any interest in the property
concerned. The actual level of the costs will directly affect the net yield to be achieved by freehold investments. Investors in
this instance have no alternative but take the full financial risks of ownership.
Firstly, in acquiring any interest in real
estate, the investor has to make allowance for purchase costs in addition to the purchase price itself. These additional costs may
normally comprise stamp duties, professional fees, and any VAT charged on these expenses.
Secondly, during the on-going ownership,
the rents received from the tenant(s) will largely decide the profit margin over a certain period of time, and eventually determine
whether the investment will turn out to be a success or failure. The rent value is determined by an equation of demand and supply
in the market, which in turn is influenced by the very diversity of property types involved, and other decisive factors relating
to capital supplies, inflation and/or deflation pressures, etc. The risk characteristics of a freehold investment are somewhat akin
to those attached to ordinary shares in a company and hence a freehold interest can also be defined as an equity interest.[4]
Thirdly, also in the course of the on-going ownership, management costs that are incurred principally from carrying out maintenance
obligations are unavoidable. A freehold investment is a positive investment which itself requires active management at all times.
It is only by good management that the net yield of investment can be maximised.
And finally, if the property is eventually
sold, the costs of selling will be dependent upon the type of estate involved; capital gains tax, professional charges and also VAT
may be payable on these expenditures. Also, the property market at the time of selling may happen to be at its low or high end, and
this will also influence the cost level of carrying out such a disposal.
Leasehold interests
When purchased as an investment, a leasehold interest has to be subject to a lease granted by the estate's present freeholder.
That is to say, the investment benefits of occupying property in the form of a leasehold can only be crystallised by giving up his
rights to occupy and use the property, and creating a subsidiary lease. Under such circumstances, the investor behaves in the capacity
of the head lessee who sublets the premises to someone else (i.e. the sub-lessee, the actual occupier).[5] As compared with a freehold, factors affecting investment interests vested in a leasehold tend to be more complicated.
Firstly,
the yield of a leasehold investment will depend on the difference between the rental income received from the actual occupier(s)
and the rent paid to the estate's freeholder. The whole operation must be properly arranged in accordance with the terms of both
the head lease and the sub-lease. As it is most likely that the terms of the sub-lease will have to be geared in the light of those
fixed by the head lease throughout the whole duration, a leasehold investment is therefore a rather passive investment, and the investor
involved might have to be restricted by more factors which he himself has no capability to control.
Secondly, it is usual practice
that frequent reviews to both the head rent and the sub-rent are provided. The values of these two kinds of rents at a certain time
are closely interrelated, and also subject to their respective equation of demand and supply in the market. Therefore, a huge profit
rent can hardly be expected to be built up between these reviews.
And thirdly, as a leasehold is created on the basis of a fixed
number of years, its life is limited, and the advantage of such attribute is that timing of further trading arrangement of the premises
might be easier to be made than in the case of a freeholder. However, its defect is also obvious. Within a rather short period
of time, capital value of a leasehold investment can rarely be expected to grow as fast as the head rent expenditure. And it is
especially true in the event of a sluggish market.
-
In general, if purchased purely as an investment, leasehold interests will be less vital to the investor than those vested in a freehold.
It would be more productive if the investor could orientate the majority of his investment activities towards freeholds.
-
Whereas estate investment needs finance, the financial interests lie in the real estate's role as a vehicle for raising funds. The
existing market may provide investors the opportunity of using the property in question as a vehicle for raising funds by way of
mortgage.
-
There are two reasons that the investor may benefit from the possible finance supplied by the market. Firstly, repayment of loans
secured from mortgages can be guaranteed by the physical estate in question. And since the increase of real estate's capital value
is long time-scaled, many financial organisations may have interests in providing investors a significant proportion of funds required
for acquiring or developing properties. Secondly, as the general trend is that the expected rate of return from rental income keeps
abreast of the inflation rate at the same time, financial lenders may be rewarded a rather considerable amount of income from the
interest accrued. Therefore, it is likely that investors may obtain the required funds from the existing real estate market by making
use of the estate in question as a financing stepping-stone.
-
However, since mortgages have to be repaid and interest accrued on them is charged in advance, the investor must be very careful
when deciding his prospective repayment scheme. Consideration should be given primarily in three aspects: a) whether the costs incurred
by the possible interest increase can be effectively avoided or reduced; b) whether mortgage interest reliefs can be secured; and
c) whether such mortgages are allowed to be used to purchase not only the previous premises from which the loans in question are
acquired, but new estates as well.
-
Since inflation has the effect of enhancing the monetary value of rental incomes which will in turn be reflected in capital values,
one of the main attractions of real estate investment comes from the likelihood that real estate may become a complete hedge against
inflation. Therefore, in history, property has probably formed a major part of investment portfolios merely on this basis.[6]
-
In a published study in the UK by Limmack and Ward (1988) dealing with inflation hedging in an economically defensible manner as
regards property investment, the possible relationship between property returns and unexpected inflation was estimated by using a
ten-year data sample of quarterly returns from the Jones Lang Wootton property database.[7] The conclusion was that investors could expect returns to be higher in those periods when inflation was expected to be high.[8]
-
The system of development control in the UK requires an investor to obtain a specific planning consent for virtually every development
to be conducted in real estate business. It is important for the investor to carry out detailed investigation about the possible
influence of the relevant legislation on a particular piece of land before any development is intended.
-
There is a huge mass of detailed legislation controlling the use and enjoyment of land, and the system of development control in
the UK is thus supposed to be one of the most sophisticated in the world. However, the principal planning statute now in force is
the Town and Country Planning Act 1990 (the 1990 Act), which consolidates the previous statutes from the Town and Country Planning
Act 1947 onwards. To support this basic legislation as well as orientate government policies in planning consideration to the need
of development control, a series of guidance has additionally been formulated by the central government in the form of Planning Policy
Guidance notes or Ministerial Circulars, and by the local governments in the form of development plans.
-
Although planning control is ultimately administered by the Secretary of State for the Environment, it is generally exercised by
the local planning authorities.[9] By sections 70 and 172 of the 1990 Act, the local planning authority exercises the control by granting or withholding planning permission
and can take action against breach of planning control by means of enforcement proceedings, having regard to the development plan
and to any other material considerations.
-
The development plan has been described as a key phrase in the planning authorities' vocabulary. It usually consists of a "structure
plan" setting out the local planning authority's policy for the development and other use of land in the area covered by the plan
supplemented by local plans which develop the policies and general proposals of the structure plan and relate them to the districts.[10] The investor should be aware that under normal circumstances, he should produce a unitary development scheme which ought to be in
compliance with the local authorities' overall development plan. To be more elaborate, his development proposal should be in the
framework of structure plan and the Secretary of State's general planning guidance.
-
However, whilst the determination should normally be in compliance with the development plan, some concessions are available under
the central government's Planning Policy notes, in the event of some material considerations which will enable other factors to be
taken into account. If the investor appreciates that his development proposal might contradict the local authority's development
plan, he must make sure that contrary planning grounds can be demonstrated to justify his proposal, and in this regard the development
plan may not be regarded as overriding other material considerations especially where the plan does not deal adequately with new
types of development.[11] The investor's justification should cover a multitude of matters, relating to the proposed development, such as its favourable impact
on the environment, local employment and creation of new industry and commerce, etc. In short, he must try to provide the right
conditions for encouraging the local economic growth.
-
Once it has been established that a proposed activity constitutes development, it must be decided whether an application should be
made for planning permission. In the case that the investor is doubtful about whether his proposed action will constitute development
and require planning permission, by virtue of section 64(1), he may apply to the local planning authority for a written determination
on the point.
-
In general, planning permission is required for any development of land with very few exceptions. The need for planning permission
depends on the definition of development. Development is defined by section 55(1) as the carrying out of building, engineering,
mining or other operations in, on, over, or under land, or the making of any material change in the use of any building or other
land.
-
It is important to grasp the two parts embodied in the above formula - operations and change of use.[12] If a particular operation or change of use involves development as defined in the stipulation, it will require planning permission.
If not, no planning permission is required.
-
The application for planning permission must be made on a form issued by the local planning authority, accompanied by a plan sufficient
to identify the land and such other plans and drawings as are necessary to describe the development.[13]
-
Planning permission is in normal circumstances granted by a development order or by express grant. According to section 59(1) of
the 1990 Act, the Secretary of State shall by a development order provide for the granting of planning permission. Also under section
59(2), a development order may either a) itself grant planning permission for development specified in the order or for development
of any class specified; or b) in respect of development for which planning permission is not granted by the order itself, provide
for the granting of planning permission by the local planning authority on application to the authority in accordance with the provisions
of the order. The Town and Country Planning General Development Order 1988 is the order of general application providing for the
grant of planning permission for the development of land, in the context of the provisions contained in section 59 of the 1990 Act.
Schedule 2 to the Order 1988 sets out in detail a wide range of development for which planning permission is granted by the order
itself under the provisions of article 3. The Order 1988 gives consent for various classes of permitted development, and in this
way deregulates the planning system to some extents by providing privileges to developers who are entitled to the rights under the
order.
-
In the event that the land in question happens to be in an Enterprise Zone or a simplified planning zone, planning permission will
be automatically granted for specific development: in terms of section 88 of the 1990 Act, planning permission may be automatically
granted for specified development by an Enterprise Zone scheme; and according to section 82, a simplified planning zone is an area
in respect of which a simplified planning zone scheme is in force, and the adoption or approval of such a scheme has effect to grant,
in relation to the zone or any part of it specified in the scheme, planning permission for development specified in the scheme or
for development of any class so specified.
-
Real estate in the UK should never be acquired without the investor first obtaining competent professional advice and involvement.
This professional advice and involvement mainly comprises those services provided by estate agents, solicitors, and chartered surveyors,
etc.
-
In the case of an investor who is primarily concerned with acquiring the estate and holding it as his investment, the roles played
by estate agents may generally fall into two categories.
-
Firstly, the investor may instruct an estate agent to find a property to his satisfaction. The estate agent must advise the investor
on the physical conditions and the current value of the property discovered, and may subject to securing the investor's approval
arrange meetings between the investor and property's present owner. Secondly, after the relevant property acquisition is concluded,
the investor may again instruct the estate agent to find a prospective purchaser for the purpose of reselling the property when timing
is opportune.
-
Solicitors are principally responsible for conveying properties to be acquired, and preparing the necessary legal documents throughout
the whole life of the investment.
-
While solicitors provide services on legal matters generally, in the course of acquisition, they are mainly concerned with transferring
the legal title of the property to the investor, and also detailing the rights and liabilities incidental to the ownership.
-
Property valuation is an important factor affecting an investment decision. An estate's value is largely determined by the very
diversity of property ownership, settings and types, which may give rise to a wide range of approaches to property valuation. A
chartered surveyor, with his knowledge of the relevant market, can provide services for valuing the potential property.
-
The actual procedures for completing purchase contracts normally comprise four stages: a) pre-contract enquiries and searches; b)
contract preparation; c) contract conclusion; and d) transfer in registered title, or conveyance in unregistered title.
-
Before a contract is created, a number of enquiries and searches usually have to be made by the investor, or his solicitor, to obtain
information on matters which could affect the purchase in his decision whether or not to proceed.
-
Enquiries may generally include basic information about the property, and special attention would be drawn towards whether there
have been any disputes in respect of the estate itself.[14] However, due to fears about liability for misrepresentation, it is likely that some property owners, or their solicitors, may give
very evasive answers to such enquiries,[15] and therefore it will be necessary to conduct a property viewing before the contract is prepared.
-
Searches are usually made in the local land charges registers. These registers are maintained by the local authorities for the properties
in these areas under section 3 of the Local Land Charges Act 1975. The registers contain details of a variety of charges relating
to financial, planning and environmental matters.[16] Since all these matters may have a considerable effect upon the use to which the property can be put, it is necessary for all investors
to carry out the pre-contract searches. The local authority's reply to a search includes an official certificate of search (section
8(4)). It is important to obtain such a certificate for it indicates what entries relating to the property appear in the register
of charges. If later a charge is discovered which has not been revealed by the certificate, by virtue of section 10, the prospective
purchaser can claim compensation against the local authority.
-
Generally speaking, a contract for property acquisition should comply with the basic requirements for any other contract. However,
because of the considerable finance involved in property investment, creation of a legal relationship under such circumstances requires
greater formalities. And in this regard, the date of 27 September 1989 becomes an important demarcation line.[17]
-
Before 27 September 1989, the rules governing contracts made for property acquisition were contained in L.P.A. 1925. Their original
main description was represented by section 40(1) as follows: no action may be brought upon any contract for the sale or other disposition
of land or any interest in land, unless the agreement upon which such action is brought, or some memorandum or note thereof, is in
writing, and signed by the party to be charged or by some other person thereunto by him lawfully authorised. The biggest defect
reflected from this provision was that L.P.A. 1925 did not totally prevent an oral contract from coming into existence. Thus, an
amendment was necessary and the law was changed in 1989.
-
In regard of the most vital formalities to be complied with, the Law of Property (Miscellaneous Provisions) Act 1989 contains the
relevant rules which apply to all contracts made on or after 27 September 1989. The new law regulates by section 2(1) that a contract
for the sale or other disposition of an interest in land can only be made in writing and only be incorporating all the terms which
the parties have expressly agreed in one document or, where contracts are exchanged, in each. It is noteworthy that under the new
law, a contract must be made in writing, and the shortcoming of the old law which did not completely render oral contracts invalid
is accordingly removed.
-
The new law also provides under section 2(2) that the terms of the contract may be incorporated in a document either by being set
out in it or by reference to some other document. As can be seen, this rule requires that all the terms agreed should be recorded
in one document or reflected by making express reference to some other document. The contract will no longer be enforced if a term
is agreed but for one reason or another not recorded in the document. A further formality contained in section 2(3) provides that
the document incorporating the terms or where contracts are exchanged one of the documents incorporating them (but not necessarily
the same one) must be signed by or on behalf of each party to the contract. That is to say, the contract will not come into existence
until both sides sign it. In reality, it is normal practice that two copies of contract are prepared and signed by or on behalf
of each side to the contract.
-
Conclusion of the contract, to an investor, can be defined in two aspects. One is the particular method of concluding a contract
adopted for acquiring the estate. The other is the prompt arrangement of adequate insurance cover for the investor's own benefit.
-
The common way of concluding a contract starts from preparation of two identical copies of the contract, each signed by one party,
and ends in the exchange of the contracts which thus create a legally binding relationship between the two parties. In addition,
it is normal for the investor to pay a portion of the purchase price to the estate owner as an initial deposit.[18]
-
From the moment a valid contract is concluded, the insurance risk will pass to the investor who is already beneficial owner of the
property. Thus, pending the completion of the whole acquisition process, the estate in question will have two owners at the same
time. On the one hand, since in the context of section 52(1) of L.P.A. 1925 all conveyances of land or of any interest therein are
void for the purpose of conveying or creating a legal estate unless made by deed, the present estate owner remains the legal owner
until a deed conveying the legal estate has been signed, witnessed and delivered in the case of his ownership of an unregistered
title, or registered in the case of a registered title. He accordingly occupies a fiduciary position as the estate trustee, and
must manage and preserve the estate with the same care as a trustee must show with regard to trust property,[19] until the sale is finally completed. On the other hand, while the investor becomes the equitable owner once the contract is concluded,
he must also bear the risk of any loss or damage suffered by the property, and from the date fixed for completion meet the cost of
all necessary outgoings.[20] In the event of the absence of any obligation on the estate owner (i.e. the seller) to maintain any insurance, there is no guarantee
that the policy effected by the estate owner will continue to cover the risk suffered by the estate to be acquired. Hence, for the
investor's own benefit, it is necessary for him to make the prompt arrangement of adequate insurance from the moment an enforceable
contract is made.
-
After a contract is concluded, the investor should not proceed to accept the physical property until he is convinced after investigation
that the title of the present estate owner is good and he is really entitled to pass to the investor the estate which he is offering
to sell. Also, the investor should try to verify via investigation that whether there are any third party rights to the property
which might interfere with his proposed use of it.
-
The title to the property can be proven under two separate systems of conveyance. One is the registered system, and the other is
the unregistered one. The registered system is principally governed by the Land Registration Act 1925, while the unregistered system
is mainly ruled by the provisions contained in L.P.A. 1925 as well as the Land Charges Act 1972.
-
The registered system is supposed to be the newer system. It exists in the context of the Land Registration Act 1925, which highlights
the point by section 1(1) that there shall continue to be kept at the Land Registry a register of title to freehold and leasehold
land. The original intention of the Land Registration Act 1925 was to make future registration of title to the property become compulsory.
However, due to the economic depression followed by the war and further recession, the promotion of the registered system was held
up until 1984 when the British government pledged that it would make the entire country an area of compulsory registration within
ten years.[21] The government's promise has been fulfilled and the last areas became compulsory areas on 1 December 1990.[22] Thus, now all property falls in an area of compulsory registration, and the investor may simply find out whether a registration
has been made by checking at the Land Registry, and making an "index map search".[23] Nonetheless, even in areas of compulsory registration, the titles to some properties are not registered. There are two reasons
for the existence of the unregistered properties: firstly, the Land Registration Act 1925 does not mention that an estate must be
registered, although failing to do so is likely to be at the risk of making the acquisition void and eventually losing it (sections
19, 22 and 123(1)); secondly, many property owners may not have their estates registered for fear of the cost incurred by registration.
-
In the case of the unregistered title, the present estate owner has to demonstrate his legal ownership by producing the title deeds
of the property to the investor. Also, as the current owner last conveyed to, he must prove that the estate has been correctly conveyed
from one owner to another over years.[24] The investor may require that the property owner start with a good root of title. The good root of title is a document which records
a dealing with the whole legal and equitable interest in the property and which contains nothing to cast any doubts on the validity
of the title.[25] And once a good root of title has been shown, the estate owner must produce every deed after the good root of title which has affected
the property.[26]
-
Under the Land Registration Act 1925, investigation of any third-party rights in the registered property to be acquired should be
conducted by the investor focussing on two possible matters - overriding interests and minor interests. Overriding interests according
to section 3(xvi) mean all the incumbrances, interests, rights, and powers not entered on the register but subject to which registered
dispositions are to take effect. The investor must be aware that overriding interests are important third-party rights over the
property and have the automatic binding effect upon him although they are not indicated on the register. Minor interests are defined
by section 3(xv) as those third-party rights in registered property, which are not substantially registrable and not overriding interests,
either. Whilst it can be deduced that minor interests are unenforceable at law and void against the investor, the Land Registration
Act 1925 provides entries on the register by means of which minor interests can be noted and accordingly properly protected.[27]
-
In the case of an unregistered property, third-party interests usually embody land charges under the Land Charges Act 1972, and other
legal interests which are not land charges. Land charges consist of the interests included on the list in the Land Charges Act 1972,
and these interests are accordingly protected by registration at the Land Charges Registry.[28] Also, the investor during the course of purchasing is automatically bound by all legal interests in the land which are not land
charges (most are not on the land charges list).[29]
-
Real estate and finance are always linked with each other. An investor can usually accomplish his investment scheme by financing
either property development, or property acquisition, or both.
-
Property development needs finance to cover the property's whole construction period. In this case, the investor acts in the capacity
of the developer. He has to raise finance to pay for the costs of production including the purchase of land, building costs, professional
fees and marketing costs.[30] Since the construction period involved in property development is relatively short, a mortgage as a major instrument of finance,
will rarely be used at this stage, unless at the end of the development period the investor has the property refinanced on a long-term
basis for retaining it rather than selling it to realise a profit. Thus, finance for property development is mainly obtained from
the banks and exists in the form of bank lending debt on the short-term basis.[31]
-
The cost of financing may vary depending on a series of factors including current market situation, quality of scheme, and commercial
prospect of properties to be developed, etc. On the one hand, as the bank lending markets in the United Kingdom are extensively
globalised, there are currently a wide range of sources available for the financing of property development. On the other hand,
banks providing debt finance will wish to be satisfied with the developer's financial strength, the collateral to be provided as
security for the loan, the viability of the project, and the arrangement for repayment of the loan with reference to the investor's
track record in previous projects and reliability.[32]
-
Moreover, short-term finance can be quite expensive because of the limited security in an incomplete property. Therefore, the investor
once obtaining the finance should try to finish the construction as quickly as he can and if possible, try to repay the finance by
selling the project during the construction period.
-
As another method of real estate investment, property acquisition can be used to realise its anticipated profit by acquiring the
property and then selling or letting it. In reality, it would be unwise for the investor to pay for the purchase of property outright
even if he has sufficient finance to do so. Alternatively, the investor should consider obtaining loans. Financing property acquisition
is a long-term business and therefore normally less expensive than financing property development on the short-term basis.[33] Ideally, the investor may raise his long-term finance by way of mortgage.
-
The essential nature of a mortgage is that it is a conveyance of a legal or equitable interest in property, with a provision for
redemption, i.e. upon repayment of a loan or the performance of some other obligation, the conveyance shall become void or the interest
shall be reconveyed.[34] In such case, the investor is the borrower or mortgagor. He acquires the property by borrowing against it as security for the finance
made to him by the lender (i.e. mortgagee) who in turn obtains an interest in the property. Unlike many other businesses which are
subject to statutory control, a Mortgages Act has never come about in the United Kingdom.[35] The legal principles and detailed rules governing mortgages at present are generally prescribed by L.P.A. 1925.
-
A mortgage can be a legal mortgage, or an equitable one.
-
L.P.A. 1925 provides under sections 85(1) and 86(1) that a legal mortgage can be created in only one of two ways which are either
a demise or a subdemise in terms of freehold or leasehold for a term of years absolute subject to a provision for cesser on redemption,
or a charge by deed expressed to be by way of legal mortgages. The difference between a mortgage and a charge is that a mortgage
is a conveyance of property whereas a charge conveys nothing but merely gives the chargee certain rights over the property charged.
A legal mortgage of freehold tenure is effected by a demise under which a first or only mortgagee shall take a term of three thousand
years from the date of the mortgage, whereas a second or subsequent mortgagee shall take a term one day longer than the term vested
in the first or other mortgagee whose security ranks immediately before that of such second or subsequent mortgagee (section 85(2)).
A legal mortgage of leasehold tenure is effected by a subdemise under which the term to be taken by a first or only mortgagee shall
be ten days less than the term expressed to be assigned, whereas the term to be taken by a second or subsequent mortgagee shall be
one day longer than the term vested in the first or other mortgagee whose security ranks immediately before that of the second or
subsequent mortgagee (section 86(2)). Instead of granting a long-term demise or subdemise to the mortgagee, according to section
87, the investor may simply executes a deed declaring that he is charging his property by way of legal mortgage with the repayment
of the sums specified, so as to give the mortgagee the protection, powers and remedies as if the mortgage had been made lease or
sublease. The biggest advantage of creating such a charge by deed is attributable to its simple and more realistic form. A charge
by deed can be used for both freehold and leasehold tenures, and thus made it available to replace the first two types of legal mortgage
by a shorter and more intelligible mortgage.
-
An equitable mortgage is normally made by producing to the lender the title deeds accompanied by a memorandum, which defines the
purpose of the deposit of the deeds, and contains an undertaking by the investor to execute a legal charge on demand.[36]
-
The primary right enjoyed by the investor is the right to redeem the mortgage on repayment of the loan.[37] Additionally, the investor can also be given a statutory power by section 99(1) of L.P.A. 1925 that provided that he is still in
possession of the land, he may create leases which will be binding upon the mortgagee. Furthermore, the investor also has the right
to sue in a situation in which there might be necessary for him to take legal action relating to the property, providing that he
has not been notified that the mortgagee intends to take possession (section 98).
-
The rights of the mortgagee may fall into three main categories. Firstly, under sections 85(1) and 86(1), the first mortgagee has
the right to take the title deeds from the mortgagor. The mortgagee's entitlement to such rights will in a way hamper the interests
to be created by the investor in the estate in question. Secondly, pursuant to section 101(1)(ii), in the event of no express agreement,
the mortgagee will be allowed to insure the property against loss or damage at the mortgagor's expenses. The investor must make
sure that the property has been properly insured before the mortgage is conducted so that no additional cost has to be borne by him
later on. And thirdly, pertinent to section 99(2), the mortgagee who has taken possession is at the same time given the right to
grant leases. In this circumstance, the investor will normally have no alternative but to be legally bound by the lease created
by the mortgagee.
-
It is the whole purpose of a mortgage to provide the mortgagee with a security by which his legal interests can be effectively protected
if the borrower fails to repay the loan. In this regard, there are a number of remedies - first, the mortgagee can sue for the money
due,[38] albeit the process might be very time-consuming; second, the mortgagee has the statutory right to sell the property in the case of
the investor's default (section 103), and if such a sale happens it will automatically extinguish the investor's right to redeem;
and third, the mortgagee has the right to foreclose,[39] and the effect of foreclosure is to vest the investor's whole interest in the mortgagee.
-
Since real estate is by nature durable, immovable and indestructible, an investment on it can be regarded as a long time-scale business
in which the rights existing in the estate are the primary objects to be dealt with. Hence, such investment will be inextricably
linked with acquisition of the property in question. The process of acquisition usually involves (not necessarily in this order)
solicitation of professional advice, completion of purchase contracts, and arrangement of acquisition finance. Whereas the UK's
property law is most closely linked with the trading of legal rights over land, the substance of the relating legal frameworks governing
real estate investment there in the main concerns two issues: one is about the principal doctrines relative to the practice of real
estate business in the UK, and the other relates to the main formalities required for estate acquisition. Whilst since 1989 real
estate values in the UK have been in consistent decline; in consideration of the fact that investment in real property is a long-term
venture and fluctuations in values are almost inevitable during certain times, it is still worthwhile for investors in the context
of the property law to probe into the essence of the UK's real estate market so as to keep to the general orientation of its development.
[1] Riddall, J.G., "Introduction to Land Law", Butterworths, 1988, p. 50.
[2] Fraser, W.D., "Principles of Property Investment and Pricing", Macmillan, 1984, p. 113.
[3] Ibid.
[4] Ibid, p. 141.
[5] Ibid, p. 113.
[6] Brown, G.R., "Property Investment and the Capital Markets", E. & F.N. Spon, 1991, p. 139.
[7] Ibid, p. 152.
[8] Ibid.
[9] Heap, Desmond, "An Outline of Planning Law", Sweet & Maxwell, 1991, p. 31.
[10] The Department of the Environment Circular 22/84. Also see Planning Policy Guidance Notes 12: Local Plan.
[11] Planning Policy Guidance Notes 12: Local Plan.
[12] Alder, John, "Development Control", Sweet & Maxwell, 1989, p. 63.
[13] Telling, A.E., and Duxbury, R.M.C., "Planning Law and Procedure", Butterworths, 1990, p. 134.
[14] MacKenzie, Judith-Anne, Phillips, Mary, "A Practical Approach to Land Law", Blackstone, 1992, p. 18.
[15] Ibid.
[16] Ibid.
[17] Ibid, p. 24.
[18] Ibid, p. 27.
[19] Burn, E.H., "Modern Law of Real Property", Butterworths, 1982, p. 122.
[20] Ibid.
[21] MacKenzie, Judith-Anne, Phillips, Mary, "A Practical Approach to Land Law", Blackstone, 1992, p. 16.
[22] Ibid.
[23] Ibid.
[24] Ibid, p. 56.
[25] Ibid.
[26] Ibid.
[27] Ibid, p. 46.
[28] Ibid, p. 57.
[29] Ibid, p. 66.
[30] Topping, Rosalyn, Avis, Martin, Cadman, David, and Austin-Crowe, Leslie, "Property Development", E. & F.N. Spon, 1991, p. 61.
[31] Ibid.
[32] Fraser, W.D., "Principles of Property Investment and Pricing", Macmillan, 1984, p. 274.
[33] Berry, Jim, McGreal, Stanley, Deddis, Bill, "Urban Regeneration: Property Investment and Development", E. & F.N. Spon, 1993, p.
51.
[34] Megarry, Robert, Wade, H. W. R., "The Law of Real Property", Stevens, 1984, p. 913.
[35] Riddall, J.G., "Introduction to Land Law", Butterworths, 1988, p. 373.
[36] Megarry, Robert, Wade, H. W. R., "The Law of Real Property", Stevens, 1984, pp. 926-929.
[37] Riddall, J.G., "Introduction to Land Law", Butterworths, 1988, p. 382.
[38] Megarry, Robert, Wade, H. W. R., "The Law of Real Property", Stevens, 1984, p. 931.
[39] Ibid, p. 933.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/MurdochUeJlLaw/1999/7.html
