Description of the legal term Equitable Charge:
An equitable charge is a legal interest or right over property, which is granted to a creditor by a debtor as security for the repayment of a debt or fulfillment of some other obligation. Unlike fixed or floating charges, which typically arise under statute law or common law, an equitable charge is recognized and enforced by the equity courts that are concerned with fairness and conscience. This type of charge does not confer the legal title of the property to the chargeholder but does give them a priority claim over the proceeds in the event of the sale of that property.
Equitable charges can arise in various ways – one such way is by express agreement where the parties have specifically agreed to create an equitable charge over a property. A scenario where an equitable charge might be created is when a debtor cannot give a legal mortgage due to some defect in title or some other legal encumbrance. In this instance, they may agree to an equitable charge which provides the creditor with some level of protection. It is important to note that equitable charges should be registered to give the chargee priority over third parties.
Moreover, equitable charges can also be created by implication of law or by a constructive trust when a person has acted in a way that, in fairness, they should be treated as having a charge over the property. An equitable charge created by implication might arise when a person contributes to the cost of acquiring a property but does not end up being a legal owner; equity can find that this person has an equitable charge to the extent of their contribution.
The enforcement of an equitable charge is distinct from that of a legal charge. The charge holder of an equitable charge may not have the power to sell the charged property directly. Instead, they must go to court to enforce their security, which can lead to the court ordering a sale or appointing a receiver.
Equitable charges are often seen in the context of trusts and wills where a testator may bequeath property subject to a charge without creating a specific legal mortgage, giving rise to the claim by the chargeholder against the testator‘s estate. It is also common in property settlements for matrimonial disputes where one party may keep the property but the other retains an equitable charge over it to secure financial claims.
Legal context in which the term Equitable Charge may be used:
Consider an individual, Alex, who has borrowed £50,000 from a friend, Sam, and agrees to pay back the amount within five years. Alex owns a valuable piece of art but is currently unable to give Sam a legal mortgage over it, due to a dispute with another party who claims an interest in the same art piece. To protect Sam’s interest, Alex and Sam enter into an agreement whereby Alex grants Sam an equitable charge over the art piece. This agreement should be properly documented, with clear terms indicating Sam’s rights in case Alex fails to repay the debt. However, if Alex defaults on the loan, Sam cannot just take the art piece and sell it. Sam would need to apply to a court for an order that the art piece be sold and the proceeds used to pay off the debt.
Another instance might involve a husband and wife during a divorce settlement, where the family home is in the husband’s name. The wife has contributed substantially to the mortgage repayments and renovations, enhancing the value of the property. The court might determine that it is equitable for the wife to have a charge over the property to the value of her contributions even though she is not a legal owner. This ensures that if the property is sold, the wife will recover the value of her indirect investment.
In essence, the concept of an equitable charge is central to ensuring that justice is achieved where formal legal rights have not been properly established or cannot be due to existing constraints. This mechanism allows for fairness in situations where a strict adherence to legal formalities would otherwise lead to an inequitable outcome. The flexibility of equity to look beyond written documents and agreements and to consider the intention and contributions of the parties often ensures that all who have a rightful claim to the assets in question are considered in the distribution, a fundamental principle in the British legal justice system.
