Under the old law the position was simple. A lender held the charge certificate and that meant no new entries (other than cautions) could be registered without the knowledge and consent of the lender. Thus, an unauthorised second mortgage could never have priority over the first charge, and, when a lender exercised its power of sale, everyone knew that all other interests without priority would be over-reached. This meant that a buyer from a chargee could proceed confidently, knowing that all cautions would be cancelled.

But, cautions were abolished under LRA 2002. Instead, we now have (only) notices and restrictions. Thus, a second mortgagee will now try to protect itself by registering a notice. The problem is that under the new registration regime this can be done unilaterally – and does not require the knowledge or consent of the original (first) mortgagee. Thus, a second mortgagee can register a notice to protect its interests without the knowledge of the prior lender. Having said that, the underlying law has not changed and these arrangements are therefore just a simple matter of administration; the second chargees’ interest will still be over-reached on sale. The difference, however, is that the entry will not be automatically removed from the register (because a notice could protect an interest which does have priority over the charge and which will not therefore be over-reached).

Thus, the problem with the new regime is that there can be a unilateral notice that has to be removed. There are two ways it can be removed. The first is by the beneficiary of the notice, and the second (which is usually what happens) is for the buyer himself to apply for its removal. But, the beneficiary can then object, with any dispute being referred to the adjudicator. This means that:

• for the buyer, the title is no longer ‘clean’. The buyer has no assurance that the notice will be removed and, to get it removed, he may have to incur further fees and potentially end up with a dispute before the adjudicator;
• for the lender, the marketability of the security is reduced. Indeed, buyers may require lenders to warrant that any notices will be removed (or agree to assist in any efforts to remove them).

In effect, there is potential for lenders to be held to ransom in situations where previously they would have been able to sell without any problem. Thus, a third party might register a unilateral notice subsequent to the charge, claiming a right to occupy the property pursuant to an oral tenancy. If it were to turn out that the oral tenancy was in being before the registration of the charge, it could then have priority. If so, an application to remove the notice would fail and the interest would not be over-reached. Thus, the chargee may feel it is better to pay to resolve the problem.

An excellent note from Cobbetts points out that some LR offices are still effectively following the old procedure and automatically removing subsequent unilateral notices from the registered title. While this may be convenient for lenders, it is clearly not a long-term solution (especially since the person who registered the charge might be a person who had an honest and genuine right to an interest in the property, in priority to that of the chargee).

The conclusion seems to be that there is no real solution to this problem. It looks as though amending legislation is the only real answer, but that is unlikely to happen. At the moment, it does not, in practice, seem to be too much of a problem (but it could well cause difficulties if the number of repossessions was to increase dramatically, or if this apparent technical flaw was to become more widely known). See note in [2006] The In-House Lawyer April p84. © Practical Lawyer