Back to basics #3 – Section 2 LPMPA

This is the third in our ‘back to basics’ series and this month we look at section 2 Law of Property (Miscellaneous Provisions) Act 1989 (LPMPA). Below we ask ‘Why does a lender sign security?’ and outline how section 2 is relevant to the creation of security.

Section 2 LPMPA

Section 2 LPMPA sets out that a contract for the sale, or other disposition, of land must:

• be in writing;
• incorporate all the terms agreed between the parties (this can be achieved through incorporation by reference to other documents); and
• be signed by, or on behalf, of both parties

This section was introduced so that buyers and sellers of land do not unintentionally enter into contracts to sell or acquire property; if the formalities are not followed, there is no contract for the sale.

The term ‘disposition’ includes mortgages and charges, and so section 2 applies to agreements to create a legal mortgage. This is where security documents are caught.

Not actual dispositions

• Not mortgages – contracts which result in the actual disposition of land do not need to comply with section 2 where the disposition is immediate and does not require any further action in the future. This means that section 2 does not apply to a mortgage as it is an actual disposition not a contract for a disposition. It can be useful to think of the term “contract for” as “agreement to”.
• Not leases – Section 2 only applies to those contracts that anticipate further action in the future. In Helden v Strathmore Ltd[1] it was determined that the section does not apply to leases as this is a contract that results in the immediate disposal of an interest in land.

Agreements to dispose

• Equitable mortgages – An equitable mortgage is considered to be an agreement to grant a legal mortgage, or charge, and is a land contract that must comply with section 2. The agreement will only satisfy the requirements for an equitable mortgage however where: (i) the borrower intended to transfer the beneficial title, by way of security, to the lender; and (ii) the asset subject to the security is easily and clearly identifiable.
• Agreements for lease – An agreement to grant a lease in the future would be caught by section 2.

So, why might it affect our security?

Section 2 lacks clarity and there have been numerous cases in which the courts attempt to determine which contracts it does and does not affect. This lack of certainty explains the cautious approach taken by many lenders.

• In case of error – If for some reason a legal mortgage fails to be created (for example, if registration formalities are not complied with) you may not even be left with the fallback of an equitable mortgage if you have not complied with the section 2 requirements.
• Further assurance – A further assurance clause of the type found in many security documents could be argued to be an agreement to create a legal mortgage as it often includes such an obligation in the event the security fails to be effective or future property is acquired.
• Future property – Most debentures include a provision under which the mortgagor agrees to charge any property it acquires in the future (often tied in with the further assurance clause referred to above).

What if section 2 applies?

If section 2 is likely to apply, remember that the security must:

• be in writing – the contract needs to be in writing, satisfying this should not be a problem.
• incorporate all the terms agreed between the parties – as some of the terms may be in the loan agreement or other finance documents, it is common to see a clause incorporating the terms of any other finance documents into the legal charge or debenture by reference.
• be signed by, or on behalf of, both parties – a mortgage needs to be created by deed so the mortgagor will execute as a deed. Normally a lender will sign the charge under hand and not by way of deed. The lender is signing merely to satisfy the section 2 requirements and does not need to enter into the charge by way of deed.

Don’t panic

It is not unusual to come across legal charges that have not been signed on behalf of the lender.  This does not necessarily mean there is an issue with validity. If the requirements for creating a mortgage (including registration) have been complied with there is more likely than not a valid charge. However, if they have not been complied with you may have difficulty enforcing further assurance provisions or any equitable charge as they may be subject to challenge. If you notice the omission in existing security then seek advice as often it can be remedied going forward.

[1] Helden v Strathmore Ltd [2011] EWCA Civ 542