Mortgages - Priority of mortgages

Learning Outcomes

This article outlines the mortgage priority rules for registered and unregistered land, including:

• Basic priority rule in registered land (LRA 2002 s.28) and special priority rule for registrable dispositions for value (s.29); operation against unprotected interests
• Priority between registered charges under s.48 LRA 2002 and the impact of delays or errors in registration
• Priority of legal and equitable mortgages in unregistered land, including the role of the Land Charges Act 1972, the significance of puisne mortgages, and the residual application of the doctrine of notice
• Overriding interests under Schedule 3 LRA 2002 and their effect on registered mortgages; timing and exceptions for persons in actual occupation
• Overreaching’s effect on priority when the mortgage advance is paid to two trustees, and outcomes when overreaching fails
• Tacking of further advances in registered land (LRA 2002 s.49) and the stricter position in unregistered land; priority where lenders have or lack notice of intervening charges
• Postponement agreements: content, effects, and required register entries to bind successors
• Equitable subrogation and marshalling as equitable devices that may alter priority in limited circumstances

SQE1 Syllabus

For SQE1, you are required to understand the rules governing mortgage priority in registered and unregistered land and the relevant statutory and equitable frameworks, with a focus on the following syllabus points:

• Priority rules in registered land: LRA 2002 ss.27, 28, 29, and 48; the significance of the charges register and the distinction between protected and unprotected interests.
• Priority rules in unregistered land: legal versus equitable interests; Land Charges Act 1972 classes and effects; doctrine of notice where registration is unavailable; puisne mortgages.
• Overriding interests under Schedule 3 LRA 2002, especially actual occupation, timing (completion/registration), and exceptions for failure to disclose or non-obvious occupation.
• Overreaching: how payment of capital monies to at least two trustees affects priority against beneficial interests under a trust.
• Tacking: conditions for adding further advances to the security while retaining priority in registered land (LRA 2002 s.49) and the general position in unregistered land.
• Postponement agreements: deeds varying priority between lenders and the need for appropriate register entries.
• Ancillary equitable devices: equitable subrogation (restoring priority where a lender discharges an earlier charge in mistake) and marshalling (arranging realisations to minimise prejudice to junior creditors).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. In registered land, what generally determines the priority between two registered legal mortgages?
   1. The date the mortgage deeds were signed.
   2. The amount of the loan secured by each mortgage.
   3. The date each mortgage was entered on the register.
   4. The intention of the mortgagor.
2. Which of the following equitable interests affecting unregistered land MUST be registered as a land charge under the LCA 1972 to bind a purchaser of a legal estate for money or money's worth?
   1. A beneficial interest under an implied trust.
   2. An equitable easement created after 1925.
   3. An equitable interest arising by estoppel.
   4. A restrictive covenant created before 1926.
3. Under the LRA 2002, which of the following is an example of an interest that might override a registered mortgage?
   1. An equitable mortgage protected by notice.
   2. A restrictive covenant registered as a land charge before first registration.
   3. The interest of a person in actual occupation, such as a beneficiary under a trust.
   4. A legal mortgage created later in time than the registered mortgage.

Introduction

When land is the subject of multiple mortgages, charges, and other third‑party claims, the order of priority determines who is paid first and whether junior interests survive an enforcement sale. In registered land, statutory rules pivot on registration and protection of interests; in unregistered land, rules pivot on legal versus equitable status, a land charge search, and (in a shrinking set of cases) the doctrine of notice. Priority disputes often turn on apparently small factual events—such as the timing of registration or whether a mortgage advance was paid to two trustees—that have major legal consequences. Understanding the architecture of priority is essential not just for lenders and borrowers, but also for purchasers, insolvency practitioners, and anyone dealing with co‑owned property or trust interests.

Key Term: Priority
The order in which competing interests in land rank against each other, determining which interest prevails or is satisfied first, especially upon sale or enforcement.

Key Term: Registered Land
Land where title is recorded in a central register maintained by HM Land Registry, governed by the Land Registration Act 2002.

Priority in Registered Land

In registered land, statutory rules in the LRA 2002 decide priority with precision. The starting point is to ask what kind of disposition occurred, whether it was for value, and whether pre‑existing interests were protected on the register or qualified as overriding. A legal mortgage of a registered title is a registrable disposition: it only takes effect at law when entered on the charges register (s.27(1) and s.27(2)(f) LRA 2002). Until then, it is equitable at best, and vulnerable to the special priority rule in s.29.

The specific priority rule for registered charges is in s.48: within the class of registered charges on a title, they rank according to the order of entry on the register, not the order of creation. That is distinct from the broader s.28/s.29 framework that governs how a newly registered disposition for value interacts with pre‑existing interests.

The Basic Rule: Section 28 LRA 2002

Section 28 lays down the default rule: the priority of an interest affecting a registered estate is not affected by a disposition of that estate. Interests rank by the date of their creation as between themselves. If there is no registrable disposition for value, or if the disposition is not completed by registration, priority remains as it stood. Thus, a donee or devisee takes subject to all pre‑existing interests, regardless of protection on the register.

This basic rule matters in practical scenarios where a transfer is by gift, a court order, or another non‑valuable consideration event. It also applies where a registered disposition has not been completed by registration—until registration is complete, it does not have the effect at law contemplated by s.27(1), and s.29 does not engage.

The Special Priority Rule: Section 29 LRA 2002

Section 29 is the ‘priority engine’ for registered land: a registrable disposition of a registered estate for valuable consideration that is completed by registration takes priority over any earlier interest affecting the estate unless that earlier interest is protected on the register (notice/restriction or registered charge) or is an overriding interest under Schedule 3.

The rule has several critical features:

• “Valuable consideration” includes money or money’s worth. A legal mortgage granted to secure a loan is plainly a disposition for value.
• Protection on the register means either the earlier interest itself is a registered charge or registered title, or an entry has been made to protect it (commonly a notice under s.32 LRA 2002, or a restriction under s.40 where appropriate).
• If the earlier interest qualifies as a Schedule 3 overriding interest, the registered disposition for value does not defeat it. Actual occupation (Sch 3, para 2) is the prime example, subject to exceptions.
• Where the earlier interest is neither protected nor overriding, s.29 can strip it of priority against the registered disposition for value.

The practical importance is acute, especially for equitable rights: unless protected by notice or restriction (as permitted), a later registrable disposition for value that is duly registered will take free of them.

Key Term: Notice (LRA 2002)
An entry made in the charges register of a registered title to protect a third‑party interest (other than a trust interest), ensuring it binds subsequent purchasers or chargees.

Key Term: Restriction (LRA 2002)
An entry made in the proprietorship register of a registered title that regulates the circumstances in which a disposition may be registered, often used to protect beneficial interests under a trust by requiring payment to two trustees (overreaching).

Priority Between Registered Charges (Mortgages)

Section 48 LRA 2002 provides that registered charges rank in priority according to the order in which they are entered on the register, not the order in which they are created. A first‑registered charge takes priority over later‑registered charges—even if the later charge was created earlier in time but registered later. This “first entry wins” rule is independent of s.29 and settles the internal ordering of registered charges shown on the charges register.

The operation of s.48 can produce unexpected outcomes if a lender delays registration. While a legal mortgage only takes effect at law once registered, an intervening charge registered earlier will outrank it under s.48. That is why prompt registration is both a legal requirement (to be legal) and a priority imperative.

Worked Example 1.1

Farah owns registered freehold property. On 1st May, she grants a legal mortgage to Bank A by deed. On 1st June, she grants a legal mortgage to Bank B by deed. Bank B registers its charge on 15th June. Bank A registers its charge on 1st July. The property is sold, but the proceeds are insufficient to repay both banks. Which bank has priority?

Answer:
Bank B has priority. Under s. 48 LRA 2002, the priority of registered charges depends on the date of registration, not creation. Bank B registered its charge on 15th June, before Bank A registered on 1st July. Therefore, Bank B will be repaid first from the sale proceeds.

The relevance of s.27, failure to register, and s.29

A “legal mortgage” over a registered estate is a registrable disposition and does not take effect at law until entered on the register (s.27(1) and s.27(2)(f)). If a lender takes a mortgage by deed but fails to register promptly, its interest is merely equitable and vulnerable to s.29 if a later purchaser or chargee for value completes their disposition by registration. If the earlier equitable interest is unprotected by notice/restriction and not overriding, the registered disposition for value will take priority. Once both charges are registered, s.48 determines their internal ranking by date of entry.

Worked Example 1.2

Jian grants a mortgage by deed to Lender M on 2 January, but Lender M delays registration. On 10 January Jian grants a second mortgage by deed to Lender N, who registers on 12 January. Lender M then registers on 20 January. A year later Jian defaults. Which lender has first priority?

Answer:
Lender N. Lender N’s charge was entered on the register earlier (12 January) than Lender M’s (20 January). Under s.48 LRA 2002, registered charges rank by order of entry irrespective of the date of creation. Lender M’s delay converted what should have been a first charge into a junior charge.

Priority in Unregistered Land

In unregistered land, title is shown by deeds and priority rules rely on the status (legal/equitable), land charge registration where available, and the doctrine of notice for a limited set of equitable interests.

Key Term: Unregistered Land
Land where the title is not recorded at HM Land Registry but is proved by examining historical title deeds.

Legal vs Equitable Interests

• Legal rights generally bind the world. A legal mortgage of unregistered land created by deed binds subsequent purchasers and mortgagees, subject to one important exception: the puisne mortgage (a legal mortgage where the first lender holds the title deeds) must be registered as a Class C(i) land charge to bind a purchaser; otherwise, it is void against a purchaser of a legal estate for value.
• Equitable rights may bind unless defeated by a purchaser for value of a legal estate without notice (doctrine of notice), but for many post‑1925 equitable rights, protection is via the Land Charges Act 1972 and not the doctrine of notice.

Key Term: Doctrine of Notice
In unregistered land, a purchaser of a legal estate for value without actual, constructive, or imputed notice of an earlier equitable interest takes free of that equitable interest.

The Land Charges Act 1972 (LCA 1972)

Many equitable interests created on or after 1 January 1926 must be registered as land charges to bind purchasers:

• Estate contracts (Class C(iv)), restrictive covenants created after 1925 (Class D(ii)), and equitable easements created after 1925 (Class D(iii)) are among the key categories.
• Registration is deemed actual notice to all persons (s.198 LPA 1925), so a registered land charge binds a purchaser regardless of their knowledge.
• Failure to register has severe consequences. For classes such as C(iv) and D(ii)/(iii), an unregistered land charge is void against a purchaser of a legal estate for money or money’s worth. The purchaser’s actual knowledge is irrelevant (Midland Bank Trust Co Ltd v Green).

Key Term: Land Charge
An interest affecting unregistered land that is registrable under the Land Charges Act 1972 against the name of the estate owner. Registration provides notice to purchasers.

Residual Role of the Doctrine of Notice

The doctrine of notice remains for:

• Equitable interests predating 1926.
• Equitable interests outside the LCA 1972’s scope (e.g., beneficial interests under trusts of land), though these are often overreached on sale (see below).

In situations where the doctrine applies, a bona fide purchaser for value of a legal estate without notice takes free of the earlier equitable interest.

Worked Example 1.3

Giles owns unregistered freehold land. He granted a legal mortgage to Lender A, who took the title deeds. He then granted an equitable mortgage (by written contract) to Lender B, who failed to register it as a land charge. Giles then granted a legal puisne mortgage to Lender C, who registered it as a C(i) land charge. Giles defaults, and the property is sold. What is the priority order?

Answer:

1. Lender A (first legal mortgage protected by deposit of deeds).
2. Lender C (legal puisne mortgage, protected by registration as a C(i) land charge).
3. Lender B (equitable mortgage, unregistered as a C(iii) land charge, is void against Lender C, a purchaser of a legal interest for money's worth).
   Therefore, Lender A is paid first, then Lender C. Lender B will recover only from Giles personally if at all.

Factors Affecting Priority

Several factors can alter mortgage priority beyond the basic registration and notice rules.

Overriding Interests (Registered Land)

Under s.29 LRA 2002, overriding interests (Schedule 3) bind registered dispositions for value even though they are not entered on the register. For mortgage priority, the most significant are:

• Persons in actual occupation (Sch 3, para 2) who have a proprietary interest. If their occupation is obvious on a reasonably careful inspection or the mortgagee has actual knowledge, their interest may override the registered mortgage unless an exception applies (e.g., failure to disclose on inquiry).

Timing and exceptions are important:

• Actual occupation must exist at the time of the disposition (for mortgages, the relevant time is completion), and the interest must exist then. There is no “scintilla temporis” allowing occupation to arise between completion and registration (Abbey National v Cann).
• Temporary absence may still amount to actual occupation if there is continuity and an intention to return, and visible signs of occupation are present (Chhokar v Chhokar; Link Lending v Bustard).
• Occupation that is not obvious on careful inspection does not override unless the mortgagee has actual knowledge; failure to disclose upon reasonable inquiry also defeats overriding status.

Key Term: Overriding Interest
An unregistered interest listed in Schedule 1 or 3 of the LRA 2002 that binds a purchaser for value despite not being entered on the register (e.g., short legal leases, rights of persons in actual occupation).

A critical overlay is overreaching. If a mortgage advance is paid to at least two trustees of land (or a trust corporation), beneficial interests under a trust are lifted from the land and attach to the proceeds (ss.2 and 27 LPA 1925). In that case, a beneficiary’s interest cannot override the mortgage—even if they are in actual occupation—because their interest has been overreached. By contrast, payment to a single trustee does not overreach, so a beneficiary in actual occupation may have an overriding interest, potentially defeating the mortgagee’s priority (e.g., Williams & Glyn’s Bank v Boland). In co‑ownership scenarios, payment of the advance to two registered proprietors (who hold the legal estate as joint trustees) ordinarily secures overreaching (City of London Building Society v Flegg).

Worked Example 1.4

Noah purchases a registered freehold in joint names with Aisha. They hold as trustees for themselves and Aisha’s sister Zara, who lives at the property and has a beneficial interest under a constructive trust. Noah later grants a legal mortgage for value. The mortgage advance is paid to Noah and Aisha, both registered proprietors. Zara claims her equitable interest overrides the mortgage by actual occupation. Who has priority?

Answer:
The mortgagee has priority. Payment of capital monies to two trustees overreaches beneficial interests under a trust, so Zara’s interest is transferred to the mortgage advance. Her actual occupation cannot defeat the mortgage once overreaching occurs.

Tacking Further Advances

Tacking is the ability of a lender to add a subsequent further advance to the existing charge while retaining the original priority against intervening charges, subject to strict rules.

Key Term: Tacking
The process by which a lender adds a further advance to their existing mortgage security, potentially retaining the original priority date for the new funds over subsequent charges, subject to specific rules.

Key Term: Further Advance
An additional loan made by a lender under an existing mortgage agreement after the initial loan amount was been advanced.

• Registered Land (s.49 LRA 2002): a lender (Lender 1) can tack a further advance with the original priority if:
  • All subsequent lenders agree; or
  • Lender 1 is obliged under the original mortgage to make the further advance; or
  • Lender 1 had no notice of the subsequent charge when making the further advance. For registered land, “notice” means entry of the subsequent charge on the register.

If none of these apply, the further advance ranks behind the subsequent charge.

• Unregistered Land: the general position is that a legal mortgagee can tack further advances ahead of an intervening mortgage only if they lacked notice of the intervening mortgage when making the further advance; equitable mortgagees typically cannot tack. Given the centrality of the title deeds, intervening legal mortgages often appear as puisne mortgages requiring land charge registration; lack of notice is assessed by the law’s traditional notice principles and any search of the Land Charges Register.

Worked Example 1.5

Petra owns registered land subject to a first registered charge to Bank X (£100k) and a second registered charge to Bank Y (£50k). Bank X's mortgage deed allows for further advances but contains no obligation to make them. Bank X advances a further £20k to Petra. Bank X was notified of Bank Y’s charge via the register before making the further advance. How does the £20k further advance rank?

Answer:
The £20k further advance ranks after Bank Y's £50k charge. Bank X was not obliged to make the advance and had notice (via the register) of Bank Y’s charge when it did so. Therefore, the further advance cannot retain the original priority under s.49 LRA 2002.

Postponement Agreements

Lenders can agree to vary their statutory or common law priority order via a deed of postponement or intercreditor deed. In registered land, the agreement should be reflected by an appropriate register entry (often by changing the ordering of charges or adding a note) to ensure it binds successors. Between the immediate parties, the deed is binding even if not noted, but absent register reflection there is risk as against a subsequent purchaser or chargee.

Key Term: Postponement Agreement
A contractual agreement between two or more lenders (mortgagees) to alter the priority order of their respective mortgages, differing from the order that would otherwise apply by law or date of registration.

Equitable subrogation and marshalling (limited, but potentially decisive)

Equitable subrogation may restore a lender to the priority of a charge it mistakenly discharged, preventing unjust enrichment of junior interests. It is fact‑sensitive and often arises when a new lender’s advance pays off a prior first mortgage in error or by fraud, and equity treats the new lender as having the same priority as the discharged charge. Marshalling is a distinct equitable device by which a junior secured creditor may require the senior creditor to satisfy out of one fund first (where several funds or properties secure the senior debt), leaving another fund for the junior creditor. These are exceptions and require careful analysis; neither overrides clear statutory rules but operate to mitigate injustice where appropriate.

Worked Example 1.6

Omar’s property is subject to a first charge to Alpha Bank and a second charge to Beta Finance. Omar refinances; Gamma Bank’s advance pays off Alpha’s first charge, but the discharge is registered and Beta’s second charge now appears to be first. Gamma’s mortgage was not properly registered due to a conveyancer’s error. Gamma claims equitable subrogation to Alpha’s former priority. Does Gamma prevail?

Answer:
On typical subrogation principles, Gamma is likely to be subrogated to Alpha’s former priority to the extent Gamma’s money discharged Alpha’s first charge. This prevents Beta obtaining a windfall by “leapfrogging” into first position. Gamma’s subrogated priority would be recognised despite registration defects, subject to facts and equitable defences.

Power of Sale and Its Priority Consequences

Priority outcomes crystallise when a lender enforces. Several statutory features govern the effect of sale and how the proceeds are applied:

• A lender exercising a power of sale transfers the borrower’s estate to the buyer:

  • Free of any estates or interests (including other mortgages) that the selling lender took priority over.
  • Subject to any estates or interests that had priority over the selling lender (s.104 LPA 1925).

• The lender is a trustee of the sale proceeds and must distribute them in the statutory order (s.105 LPA 1925):

  • Costs of redeeming any prior mortgages (i.e., mortgages with priority over the selling lender’s mortgage).
  • The selling lender’s expenses of sale.
  • The selling lender’s own mortgage debt (principal and interest).
  • The balance (if any) to subsequent mortgagees in priority order and then to the borrower.

These rules are decisive for junior lenders and equitable claimants. For example, a first mortgagee’s sale transfers title free of all subsequent mortgages; junior lenders’ recourse becomes to the sale proceeds in order, and then potentially to the borrower for any shortfall as a debt action.

Worked Example 1.6A

Lorna’s registered freehold is subject to: First charge to Bank A (£175k), second charge to Bank B (£30k), and third charge to lender C (£20k). Bank A sells under its power of sale for £200k. Sale costs are £5k. How are the proceeds distributed?

Answer:

• First, redeem prior mortgages to Bank A (none).
• Deduct Bank A’s expenses of sale (£5k).
• Pay Bank A’s charge (£175k).
• Surplus £20k then goes to Bank B (second charge) which is repaid fully (£30k is due, but only £20k remains).
• Bank B may then pursue Lorna for any shortfall. Lender C receives nothing from the sale proceeds but retains a personal claim against Lorna.

Further Worked Examples

Worked Example 1.6​

Nadia grants an equitable mortgage over registered land to Firm Q under a written contract; Firm Q enters no notice. Six months later, Nadia grants a legal charge to Bank R, which completes by registration for value. Firm Q claims priority over Bank R. Who prevails?

Answer:
Bank R prevails. Under s.29 LRA 2002, a registrable disposition for value completed by registration takes priority over earlier unprotected interests unless they are overriding. Firm Q’s equitable mortgage was unprotected and is not an overriding interest; it is postponed to Bank R.

Worked Example 1.6‌

In unregistered land, Paul grants an estate contract to Lucy to purchase land, but Lucy fails to register a Class C(iv) land charge. Paul later sells the land to David for money. Lucy seeks to enforce the option against David. Who has priority?

Answer:
David. The estate contract was a registrable land charge (Class C(iv)); failure to register renders it void against a purchaser for money or money’s worth, even if the purchaser knows of it. Lucy’s remedy lies against Paul personally if any.

Key Point Checklist

This article has covered the following key knowledge points:

• Priority decides who gets paid first; statutory rules dictate ordering and when interests are cut off or survive an enforcement sale.
• In registered land:
  • s.27 LRA 2002: a legal mortgage only takes effect at law when registered.
  • s.28: default rule—priority unaffected by a disposition; interests rank by creation.
  • s.29: a registrable disposition for value that is completed by registration takes free of unprotected interests (unless overriding).
  • s.48: ranking among registered charges depends on order of entry on the register.
• Protection on the register matters:
  • Notices protect most equitable interests (except trust interests).
  • Restrictions regulate registration and can require overreaching (payment to two trustees).
• Overriding interests under Schedule 3 (especially actual occupation) can defeat registered mortgages for value unless exceptions apply or overreaching occurs. Timing is critical—occupation must exist at the time of disposition, and there is no “scintilla temporis”.
• Overreaching removes beneficial interests under a trust when capital monies are paid to at least two trustees (ss.2 and 27 LPA 1925). Where overreaching occurs, the beneficiary’s interest cannot override a mortgage.
• In unregistered land, legal interests generally bind everyone, but equitable interests need land charge registration where required. Failure to register a registrable land charge usually makes it void against purchasers for value; actual knowledge is irrelevant.
• Tacking of further advances:
  • Registered land—s.49 permits tacking only if subsequent lenders agree, the first lender is obliged to advance, or the first lender has no notice via the register.
  • Unregistered land—legal mortgagees may tack absent notice; equitable mortgagees usually cannot.
• Postponement agreements can reorder priority by consent; in registered land, they should be reflected on the register to bind successors.
• Effect of power of sale:
  • The buyer takes free of interests junior to the selling lender’s charge and subject to interests senior to it.
  • Proceeds are distributed in the statutory order under s.105 LPA 1925.
• Equitable subrogation and marshalling may alter outcomes in limited circumstances to prevent unjust enrichment or allocate recoveries fairly, but they do not displace the statutory scheme.

Key Terms and Concepts

• Priority
• Registered Land
• Unregistered Land
• Notice (LRA 2002)
• Restriction (LRA 2002)
• Doctrine of Notice
• Land Charge
• Overriding Interest
• Tacking
• Further Advance
• Postponement Agreement