Law of Property Act 1925
|A word about credit risk mitigation
Ever seen something like this?
- Sections 93 (restriction on consolidation of mortgages) and 103 (regulation of exercise of power of sale) of the Law of Property Act 1925 shall not apply. The liabilities shall become due for the purposes of section 101 (mortgagee powers) of that act, and the statutory power of sale and of appointing a receiver conferred under it and all other powers shall be deemed to arise immediately after execution.
Wondered what it was for? Well, wonder no more.
The equitable rules as to when time is of the essence apply are incorporated into law. A bummer for hard-arsed purists of the law like the Jolly Contrarian, but nice for touchy-feely types.
By contracting out of section 93 of the Act we can consolidate all security granted by a counterparty into a single security interest. Relevant if you have multiple charges, mortgages and security interests. You might not intend to, but you never know how a relationship can develop. If you don’t disapply it, you could be left with parallel security interests, so you may lose out if there is an excess under one and a shortfall under the other (in that you may wind up as an unsecured creditor for that rump). There is no particular benefit to a client in resisting it, so if one should try to, hold the line, Toto.
Section 103 predates the cuddly consumer protection legislation we have nowadays. It is meant to stop aggressive mortgagees seizing mortgaged property before any breach by the mortgagor. It imposes grace periods which, by the atomic-clock-like standards of the modern finance industry, are positively heroic in length. Three months, for example. Three cotton-picking months.
Prime brokers, of course, are a more genteel breed and typically the document would contain provisions protecting the client from the ravages of nasty Edwardian robber barons and Georgian loan sharks. Three months - I mean, come on.
The relevant paragraphs here are Sections 101(1) (i) and (iii): the powers to sell and appoint a receiver. These powers arise “when the mortgage money has become due”. Generally under a Prime brokerage relationship liabilities become due immediately after execution of the agreement, so there is no need for due and unpaid money to acquire these two powers.
A prime broker generally won’t be able to enforce security until there has been an Event of Default. It is key to be able to sell charged assets to a third party. Without this amendment selling the charged assets would be practically difficult as the purchaser would need to investigate whether an Event of Default had occurred. The effect of this clause is that the power of sale arises as soon as the agreement is signed.
Section 136 Law of Property Act 1925 sets out the formal requirements for an assignment to be a legal assignment and not merely an equitable assignment. The key advantage this brings is that the assignee can bring a court action to enforce the assigned right without joining the assignor in the proceedings. Other than that, though, there's little practical difference between the two. The key formal requirements to comply with section 136 are that it must be or legal and not equitable right, in writing, an unconditional assignment of the whole right, expressed as a title transfer not a charge, notified to obligor of the assigned right.