Termination of Tenancies for Tenant Default - Law Commission

The courts have extended this principle to mortgagees whose security was
created by charge by way of a legal mortgage rather than by sub-demise. 19
6.26 A tenant may also appropriate or “charge” their tenancy for the payment of a sum
of money or some other obligation. 20 Where such a charge is registered, it takes
effect as if it were a charge by way of a legal mortgage even though not
expressed as such. Registered charges are often referred to as “legal charges”,
as distinguished from “equitable charges”. 21 Typically, an equitable charge will be
created by a charging order made by the court in favour of a creditor of the tenant
for a debt incurred some time after the tenancy was created (or conveyed).
6.27 Equitable chargees may not seek relief under section 146 of the Law of Property
Act 1925. 22 Where the forfeiture is for non-payment of rent, however, there is
scope for a chargee to seek relief. The route is different depending on whether
the application is brought in the High Court or a county court. County courts
appear to have jurisdiction to grant relief from forfeiture to an equitable chargee
directly. Relief in the High Court can only be achieved indirectly. This was
discussed in the CP and identified there as a defect in the current law. 23
6.28 The CP provisionally proposed that both mortgagees and chargees (whether their
interests are legal or equitable) should come within the derivative class. 24 Some
consultees sought to make a distinction between mortgagees and chargees
because the landlord will not necessarily have consented to (or even have
knowledge of) the creation of a charge. Peter Smith of the University of Reading
felt that to include chargees would “give precedence to [the] tenant’s creditors
over the landlord”. He recognised, however, that this may well be mitigated by the
conditions on which relief would be granted (which would be likely to include
payment of compensation to the landlord.) The Judges of the Chancery Division
also sought to distinguish between mortgagees and chargees, on the basis that a
mortgage is unlikely to have been granted without the consent of the landlord.
They reasoned that, if charge holders are to be included, the landlord should
have a right to be heard on the application for the making of the charging order.
6.29 Further consideration of these issues has suggested that there are serious
definitional difficulties with the term “equitable charge”. It is often difficult to
distinguish between equitable charges and other interests (such as legal charges,
equitable mortgages, and equitable liens). The terms are often used loosely and
19 Grand Junction v Bates [1954] 2 QB 160. A charge by way of legal mortgage does not
actually convey any property to the mortgagee, but statute provides that the mortgagee
has the same “protection, powers and remedies” as a mortgagee to whom the legal estate
is conveyed: Law of Property Act 1925, s 87.
20 Land Registration Act 2002, s 132(1) defines “charge” widely to include “any mortgage,
charge or lien for securing money or money’s worth”.
21 Which may be protected by entry of a notice on the register if title to the land is registered
(Land Registration Act 2002, s 32) or by the entry of a Class C (iii) land charge if the land
is unregistered (Land Charges Act 1972, s 2(4)(iii)).
22 Unless they have the right to call for their charge to be converted into a mortgage, in which
case they are treated as a mortgagee and therefore, by analogy, an under-lessee: see Re
Good’s Lease [1954] 1 WLR 309.
23 CP, paras 7.13 to 7.15.
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