Borrowing funds in your business name?

What is the difference between Legal and Equitable mortgages, and what can they do for your business?

Legal Mortgages

· A legal mortgage is the most secure and complete form of security interest.

· It usually involves a transfer of ownership of an asset, as a way of securing a debt or obligation on the condition that the ownership of the asset will be transferred back on repayment of the debt or performance of the obligation.

· It essentially transfers the legal title of the asset to the Mortgagee and prevents the Mortgagor from selling or otherwise dealing with the asset while it is subject to the mortgage.

· The most common example of a legal mortgage is when a bank takes a legal mortgage over a property. In this case, however, the ownership of the property remains with the mortgagor, and the mortgagee has a registered interest on the title of the land.

· It is common for a business entity (be it a sole trader, partnership or company) to mortgage property and assets held by the business to obtain finance, which is then reinvested into the business to increase profit. This profit is then often used to repay the debt to release the obligation of the mortgage, or to further reinvest in the business.

Equitable Mortgages

· An equitable mortgage occurs when the asset being mortgaged is an equitable interest, or when the formalities have not been completed to create a legal mortgage.

· An equitable mortgage transfers a beneficial interest in an asset to the mortgagee, while the legal title remains with the mortgagor.

· Equitable interests include such things as beneficiaries’ interests in trusts, and enforceable interests under contracts including future property.

· An interest created by an equitable mortgage may be defeated by an interest created by a legal mortgage, as a legal mortgage is usually a stronger form of security with a higher priority.

· When creating an equitable mortgage it is important for the mortgagee to take reasonable steps to have the interest recognised in the best way possible. Often this is by way of registration on a public register where available.

· An equitable mortgage is often used as a way of obtaining business finance when it is not possible by way of legal mortgage. This is particularly advantageous with future property and shares.

When considering securing finance for your business it is imperative to seek legal advice so you are fully aware of the rights and obligations both you and your business have in relation to the type of mortgage you will be entering into to secure finance.

Please contact our office on 4952 5344 for further information specific to your needs.

16 views0 comments