What sort of security is typically created or entered into by an investor who is borrowing to acquire or develop real estate?
An investor who is borrowing to acquire or develop real estate in Ireland will usually be required by the lender to enter into a first ranking fixed security over the real estate asset in question. The form which the security takes is typically a charge.
The beneficiary of the charge, normally a first fixed charge, will obtain the right to enforce its security by taking possession of the real estate and/or appointing a receiver over it and/or managing it and/or disposing of it. The beneficiary of the first fixed charge will have priority over preferential creditors (such as the Revenue Commissioners (the tax authority) and employee claims), floating charge holders and unsecured creditors. A first fixed charge holder will also have priority over second ranking or subsequent fixed charges.
The terms “mortgage” and “charge” are often used interchangeably in relation to security over real estate. In general, references to mortgages and charges are to fixed security over the real estate asset in question. The differing terminology arises from the fact that, historically, there have been two different land registration systems in Ireland, the Registry of Deeds and the Land Registry. Security was created over real estate registered in the Registry of Deeds by way of a mortgage and over real estate registered in the Land Registry by way of a charge.
Legislation introduced on 1 December 2009, means that all security over real estate is created by means of a charge. This legislation facilitated a wide-ranging update to, and reform of, Irish land law generally and it also covered the creation of, and enforcement of, security. Mortgages and/or charges which were created before 1 December 2009 are still subject to the pre-1 December 2009 rules. The Land and Conveyancing Law Reform Act 2013, introduced in July 2013, clarified an error in the 2009 legislation by providing that lenders under pre-1 December 2009 mortgages would have similar (statutory) enforcement powers to lenders under post-1 December 2009 mortgages.
Depending on the nature of the real estate asset in question, the security required by the lender may need to extend beyond a straight charge over the asset in question. It is common for security to be granted over the rental income where the asset in question generates rents and/or insurances in respect of the real estate asset. This usually takes the form of a charge and security assignment whereby the tenants are directed to pay the rental income directly to the lender (often via a management agent) and/or the insurer is directed to pay any insurance proceeds directly to the lender, so that the rental income and/or insurance proceeds do not pass into the hands of the borrower.
A corporate borrower can also create a floating charge. This is a general charge over a class of assets which is not (in the normal course) affixed to a specified asset. A floating charge is usually used where, in the course of the borrower's business, the borrower needs the flexibility to deal with the secured assets from time to time, as it usually allows the borrower to dispose of the assets the subject of the floating charge without the consent of the lender. In relation to real estate, a floating charge can be used with regard to large property portfolios where the borrower requires maximum flexibility and the lender is willing to allow the borrower to manage the portfolio without the need for a specific consent each time an asset is to be disposed of, however, it is more typical for a lender to take a fixed charge when lending against real estate.
A fixed charge over real estate can be granted by anyone, including a corporate entity, a limited liability partnership, a traditional partnership or an individual. A floating charge cannot be granted by an individual.
