The Ins and Outs of a Legal Charge for Commercial Properties

A legal charge is a charge granted over a property as security for a loan. It gives the lender certain powers in relation to the property until the loan is repaid.

The legal charge will include various covenants on the part of the borrower that it must comply with. 

The covenants will differ from lender to lender but they usually include covenants to keep the property insured, to keep the property in good repair, not to make structural alterations without the lender’s consent, not to grant any leases or other tenancies without the lender’s consent and not to enter into any other legal charge in respect of the property without the lender’s consent.

A covenant not to change the use of the property without the lender’s consent may also be included.

It's important to comply with the covenants as breaching any of them could mean that the lender can enforce its security.

It is possible to have more than one legal charge over the property, but the existing lender(s) will need to consent each time a new legal charge is granted. They would only agree to this if there is sufficient value in the property to secure all of the loans.

A deed of priority will have to be entered into, which will set out in what order the lenders should be repaid if the security is enforced, in case there is not sufficient money to repay all the lenders.

The legal charge can be discharged when all repayments have been made to the lender. The lender will provide a document called a DS1 which will confirm the discharge.

The lender can either submit an electronic DS1 directly to the Land Registry, or provide a paper DS1 to the borrower’s solicitor to remove the registration of the legal charge on the property’s title register. If the discharge is for part of the property only (for example, if the borrower is selling part of the property), the lender will provide a DS3.

If the legal charge is also registered at Companies House, the borrower’s solicitor or accountant will need to deal with the discharge at Companies House by submitting an MR04 form. 

A legal charge is an essential component of most commercial property finance arrangements, offering lenders the reassurance they need while providing borrowers with access to much-needed capital. However, it is vital to fully understand the obligations and restrictions that come with granting a legal charge, as non-compliance can have serious consequences, including enforcement action, the appointment of a receiver, or even the forced sale of the property.

Before entering into any agreement involving a legal charge, borrowers should carefully review the terms with the support of experienced legal advisors. Ensuring compliance with the lender’s covenants, properly registering the charge, and understanding your rights and responsibilities can help protect your investment and avoid costly pitfalls.

If you are considering granting or discharging a legal charge over a commercial property, seeking specialist legal advice will ensure your interests are protected at every stage of the process.