Effect of a charging order on homeowners

A final charging order is a court order which secures a debt on the property of the person who is liable to pay it (the debtor). The charge is registered with the Land Registry.

Debts that can be secured by a charging order are:

• County Court judgments

• High Court judgments

• council tax debts where the local authority has a liability order

The charging order imposes a legal or equitable charge on the property.

Legal charge

A legal charge is created where the judgment debt and charging order are made against:

• a sole owner

• all the joint owners

In this case, everyone liable for the debt is a legal owner of the property, so the charging order can grant the creditor a charge against the legal estate, in a similar way to a mortgage.

Equitable charge

An equitable charge is created where the judgment debt and charging order are made against:

• one of two or more joint owners

• someone who is not a legal owner

In this case, not everyone who is a legal owner of the property is liable for the debt, so the creditor's rights are restricted.

An equitable charge is secured against the debtor's financial stake in the property, not against the legal estate.

Charge against beneficial interest of non-legal owners

A beneficial owner is someone who is not a legal owner of a property but owns a financial stake in it. Their financial interest is held by the legal owner under a trust of land.

A creditor can apply for a charging order against the beneficial owner's interest. In practice, it could be difficult for a creditor to find out that a debtor owns a financial share in a property.

The beneficial ownership could be registered with the Land Registry.

Charge against freehold and leasehold interest

A legal charge can be secured against a debtor's freehold or leasehold interest in the property because both types of ownership are a legal estate in land. They are registered at the Land Registry.

A freehold interest is called an estate in fee simple. A leasehold interest is for a term of years absolute. The length of the lease is registered at the Land Registry.

Up to four people can jointly own a freehold or leasehold property. All the joint owners own all the land. The legal title to the land passes to the surviving joint owners if one owner dies.

The equity in the property is the money that is tied up in it. The equity is usually owned by the legal owners.

Beneficial joint tenants

Most joint owners are beneficial joint tenants. Unless they opted to be tenants in common when they purchased the property together, they are all jointly and severally liable owners.

Beneficial joint tenants each own all the equity. This is held on trust for themselves and for the benefit of the other joint owners. If something happens that requires the equity to be severed, for example a relationship breakdown or the bankruptcy of one owner, the presumption is that they each own equal shares.

When one beneficial joint tenant dies, their share of the equity automatically passes to the surviving joint tenants. This is called survivorship.

Tenants in common

Tenants in common hold identifiable shares of the equity from the outset. The amount of these shares will usually have been decided when the property was purchased.

There are situations when a property is owned by two or more people as joint tenants, but something happens which severs the joint tenancy. This results in the owners becoming tenants in common instead.

Severance of beneficial joint ownership

Some events can sever a beneficial joint tenancy. These include:

• bankruptcy of an owner

• charging order against an owner

• divorce

A charging order made against one joint owner of a property severs a beneficial joint tenancy between owners. This means that from the date of the charging order, the property is held by them as tenants in common, with a presumption that their individual shares are equal unless there is evidence to the contrary.

The owners are not notified that their beneficial joint ownership has been severed. The property does not revert back to beneficial joint ownership when the charging order debt is paid off.

Impact of severance on survivorship

The effect of the severance of a beneficial joint ownership means that if one joint owner dies, the deceased's share does not pass automatically to the surviving joint owners under the rule of survivorship. Instead, the deceased's interest in the property becomes part of their estate and must be administered according to the rules of probate.

The surviving joint owners might have to sell the property if they cannot pay off the charging order debt.

The Land Registry has records of:[1]

• postal address of the property

• whether the property is held as leasehold or freehold

• owner's name and address

• any rights or restrictions relating to the property

• details of mortgages, charges, interests in the land, and restrictions over the equity

A copy of the information can be obtained from the Land Registry website for a small fee.

Land Registry records are updated when:

• ownership is transferred

• a mortgage or charging order is registered

• a lease of seven years is created (including a residential tenancy with a fixed term of seven years or more)

Charging orders that secure certain judgment debts attract statutory interest at a rate of eight percent.[2]

Statutory interest runs from the date the judgment becomes payable unless a rule of court or a practice direction states otherwise.

Statutory interest can run on all High Court judgments.

Read more about interest on judgment debts.

CCJs that cannot attract statutory interest

Statutory interest cannot be charged on County Court judgments where the debt is either:

• for less than £5000[3]

• regulated by the Consumer Credit Act 1974[4]

• payable via instalments ordered by the court and the instalments are up to date[5]

Statutory interest does not accrue on charging orders made following a liability order for council tax arrears.

A charging order is usually paid off when the property is sold.

Charging order debt is paid off on sale

A legal charge must be paid upon the sale of the property.[6] The creditor who registered a charging order has similar rights over the property as a mortgage lender.

An equitable charge is a restriction over the property. The holder of the charge has the right to be notified if the property is sold.[7] Most conveyancing solicitors pay off equitable charges from the proceeds of sale.

What happens if the proceeds of sale do not cover the debt

The first mortgage lender always gets paid from the proceeds of sale before any other mortgages or charges.

All other mortgages and charges are paid off in the order of when they were registered at the Land Registry against the property.

Charging orders secured after other mortgages and charges will not be paid off upon sale if there are no funds left. In this case, the related judgment debt will remain unpaid and the creditor can take other steps to enforce the debt.

Pay the debt by installments

The debtor or someone else affected by the charging order, for example a joint owner of the property, could pay the debt by instalments to reduce the outstanding balance. In this case, the person making the payments can apply to court to vary the charging order terms.

A court order to pay by instalments stops the creditor from enforcing the order by sale of the property as long as the instalments are maintained.

A court order to pay by instalments also prevents statutory interest from running on the debt.