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Europe (Denmark was top with 70 per cent of GDP and Italy bottom with 10 per cent: European Mortgage Federation).

During the eleven-year period from 1991 to 2002, enforcement of mortgages of dwellings ranged from a low of 11,970 (0.11 per cent of total mortgages) in 2002 to a high of 75,540 (0.77 per cent of total mortgages) in 1991.

Comparable statistics are not available for security interests over other assets, but the Department of Trade and Industry’s annual report for 2002/2003 shows that between 150,000 and 250,000 new mortgages and charges have been granted by companies every year since 1998. Most businesses are largely reliant on bank finance, and all UK banks routinely require security over business assets as a condition of extending credit.

18.2. Forms of security

It is important to keep in mind that the grant of a security interest generally involves two distinct transactions. By the first transaction, D borrows money from C or incurs some other obligation to C. By the second transaction, O, the holder of a property interest in an asset, grants C a security interest over it in order to secure D’s obligations under the first transaction. O and D may, but will not necessarily, be the same person: you can mortgage your house to the bank to secure your own indebtedness to the bank or, if you want, to secure someone else’s indebtedness.

Security interests that are granted consensually in this way must take one of four forms, as noted above. The significance of the differences between these forms appears from Re Cosslett (Contractors) Ltd [1998] 2 WLR 131 (extracted at www.cambridge.org/propertylaw/). An outline of the salient points follows.

18.2.1. Property transfer securities: the mortgage

Any property interest in any kind of asset can be mortgaged – i.e. any legal or equitable interest in land, in goods, or in any kind of intangible property. In the case of a mortgage of anything other than a legal estate in land, O mortgages her property interest to C by transferring it to C, with a proviso that C will transfer it back to O when the obligation is discharged. Since the transfer of title is by way of security only (i.e. for C to hold as security for performance of the obligation, rather than for C’s own beneficial use), O is regarded by equity as retaining a proprietary interest (an ‘equity of redemption’) in the mortgaged property. This is a sui generis property interest, which amounts to an acknowledgment by equity that the mortgagor remains the ‘true’ owner notwithstanding the transfer of her interest to the mortgagee.

In other words, in a mortgage the mortgagor transfers ownership of the asset (or the whole of her interest, if less than ownership) to the mortgagee, retaining only the equity of redemption. In the case of goods, since ownership carries with it the right to possession of the goods, it is the mortgagee and not the mortgagor who is entitled to possession of the asset throughout the period of the mortgage. These

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in marked contrast to the cumbersome common law mortgage, which gives the mortgagee the inappropriately extensive rights of ownership of the security from the outset long before the mortgagee needs or even wants them. The disadvantage in our system, however, is the purely equitable status of the charge, as noted above.

Any kind of property interest can be charged. A charge may be ‘fixed’ (attached to a specific asset) or ‘floating’ (floating over all assets of a specified description from time to time owned by O). When a specified event (e.g. default in repayment) occurs, a floating charge ‘crystallises’, i.e. it attaches as a fixed charge to every asset of that description which O then owns. Floating charges, like fixed charges, are equitable only, and they can only be created by companies: an individual cannot grant a floating charge over her assets. The juridical nature of the floating charge is controversial, as can be seen from Agnew v. Inland Revenue Commissioner [2001] UKPC 28, PC (extracted at www.cambridge.org/propertylaw/).

18.2.4. Liens

The term ‘lien’ covers a variety of different, very specialised types of security interest, but the essential idea of a lien is that C becomes entitled to detain property of O until O’s obligation is fulfilled, as Lord Millett explains in Re Cosslett. Most liens are non-consensual (e.g. maritime liens, unpaid vendor’s lien, repairer’s lien, solicitor’s lien) but they can be created by agreement.

18.2.5. Property retention securities

A sale of property by S to B may be structured in such a way that title or possession passes to B before the full purchase price is paid, but S retains a proprietary interest in the property to be sold pending full payment. The interest retained by S in such a transaction (e.g. under a hire-purchase or conditional sale agreement, or a retention of title clause) is in all essentials a security interest, but the courts have sometimes been sympathetic towards attempts to characterise it as something else (most notably, in Aluminium Industrie Vaassen BV v. Romalpa Aluminium

[1976] 1 WLR 676, where the court accepted that the seller’s nominal retention of title until paid in full did not amount to a charge created by the buyer; this led to the widespread adoption of such provisions in continuing supply contracts: see Goode, Proprietary Rights and Insolvency in Sales Transactions, pp. 84–110).

18.2.6. Charge by way of legal mortgage

This is now, in practice at least, the only way of creating a legal security interest over a fee simple or leasehold interest in land. In order to understand the way it functions it is, unfortunately, necessary to understand its historical origins.

Until 1925, the ordinary property-transfer mortgage noted in section 18.2.1 above was used to mortgage fee simples and leases in English law. However, in 1925 it was thought that this form of mortgage would not fit well into the land registration system introduced by the Land Registration Act 1925, because under such a mortgage the owner has only an equitable (and therefore unregistrable)

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I N A P P R O P R I A T E N E S S O F F O R M

2.17. The second root cause of the artificiality and complexity of mortgage law is that the methods used to create security interests in land give rise to inappropriate relationships between the parties. This is particularly apparent in the mortgage by demise . . .

M O R T G A G E B Y D E M I S E

2.18. The problem here is of central importance because it affects not only the mortgage by demise, but also the charge by way of legal mortgage which is treated by statute as if it were a mortgage by demise, and the equitable mortgage of a legal estate, which is treated in equity as if it were a legal mortgage, and hence a mortgage by demise. The problem is that it creates a relationship of landlord and tenant between the parties. There is nothing unusual about using the leasehold relationship as an investment device: institutional lenders are probably more likely to use leases rather than mortgages as a means of financing property development or investing in nonresidential land. However, in the case of the mortgage by demise the leasehold relationship is the wrong way round: as tenant, the mortgagee has an inherent right to possession which would more appropriately lie with the mortgagor (subject to whatever restrictions may be necessary to protect and enforce the security). Similarly, it is necessary for the preservation of the security that the mortgagor should be under a duty to the mortgagee to keep the property repaired and insured, yet this is a duty more usually imposed by a landlord on a tenant, rather than by a tenant on a landlord. Even if reversed, the landlord–tenant relationship is fundamentally different from that created by a mortgage: investors under a lease-based arrangement buy outright a share in the property, and the value of the share fluctuates in direct proportion to the value of the retained property; mortgagee-investors, on the other hand, have an interest in the property only for the temporary purpose of safeguarding the repayment of a loan or performance of an obligation, and the value of the mortgagee’s interest can never exceed the value of the obligation secured. Historically, the mortgage by demise was a useful device to bridge the gap between abolition of the mortgage by assignment and general acceptance of the legal charge. Now that it has fulfilled that purpose, it seems an unnecessary impoverishment of the system to blur the distinction between lease and mortgage by continuing to define one device in terms of the other.

In the charge by way of legal mortgage (and indeed the mortgage by demise), significant modifications are made by the Law of Property Act 1925 to the basic leasehold relationship created by the security. So, for example, the mortgagee is given a statutory power to sell the mortgagor’s interest in the land free from the mortgage (section 101(1)(i): applies to all mortgages and charges made by deed) and the mortgagor is given a limited statutory power to grant leases (section 99: without such a power it would lack the capacity to do so). Also, as we see later, sometimes equity will modify the mortgagee’s common law rights to make them exercisable only for the protection or enforcement of the security. And finally the parties may, and frequently do, exclude or vary both the common law rights and the statutory modifications of them by express provision in the mortgage documents.