What is a Deed of Substitution?

A Deed of Substitution or Deed of Substituted Security is a document that enables a lender’s charge on an existing title, despite the value of the remaining financial interest in the property they continue to own, to transfer to a new one.

For example, if the old title was a freehold property which a bank held a charge over, a Deed of Substitution could transfer the charge to another property, provided the bank agrees and assuming the charge amounts to the same value.

In residential conveyancing, this generally occurs in two areas: lease extensions and transfers of part. In relation to both situations, the value of the property is likely to change. Lease extensions increase the value of a lease, and with a transfer in part, splitting up a property leads to a decrease in value of the remaining part. However, lenders still desire to maintain their financial interest in the property.

With a lease extension, a brand-new lease is drafted rather than modifying the existing one. For example, for those extensions increasing by 90-years with a peppercorn ground rent, a new title is drafted extending the terms of the lease and detailing the altered ground rent. We discuss the situation with lease extensions in more detail below.

Situations where Deeds of Substitution are often used

Two particularly common situations where a borrower may wish to substitute security in a property transaction are:

• If a lender takes security over a portfolio of property, it can agree with the borrower to include a mechanism in the security and loan paperwork where properties in the lender’s security package can be substituted for alternative properties.
• If a borrower operates a business with a fluctuating portfolio of investments, perhaps an investment fund, for example, the borrower will be under commercial pressure to act quickly when acquiring or disposing of property. And will want the flexibility, under security and financing arrangements, to dispose of property and replace them with others.

Other reasons for opting for substituted security include releasing capital or offloading non-performing properties and replacing them with superior assets. This ensures ongoing compliance with the terms and conditions of the loan by the borrower and maintains the value of the lender’s security package.

Buying a small parcel or plot of land

Perhaps you are considering buying a small parcel of land from a neighbour or buying a larger plot of land. Small parcels of land could be of any value, but typically range between £3,000 and £20,000, whilst parcels of land often exceed £20,000 because the area is likely to be considerably larger.

In order for the parcel of land in question to qualify for a new and separate title with the Land Registry, it should be noted here that you cannot transfer a part of land to yourself. This is because there are multiple ways such a situation could be abused.

If you are considering selling part of your property, you will need to instruct a surveyor to draw up a Land Registry Compliant Plan. This can also sometimes be called a boundary plan, conveyance plan, or lease plan. It is an essential document that accurately sets out the exact portion of land you are selling and marks out its boundaries.

Besides defining the land boundaries, the seller will need to consider what boundary structures will consist of. This may be a wall, hedge, or fence, for example. It will also need to be established who should own and continue to maintain the boundary. The plan must show access points and services to the property, as well as detail any land being retained.

Establishing easements

Before completing a sale on a transfer of part of land, it will need to be established whether the plot being sold will require any rights. These rights are known as “easements”, and generally include:

• Rights of access. This may mean access rights for the new plot of land over the seller’s retained land.
• Rights of services. Whether the new plot owner can connect to and use any services that are located in, under or over the seller’s retained property.

Covenants

The seller needs to carefully consider how they wish the land to be used. Perhaps there may be something you would want to prevent, such as only permitting a particular type of use or property to be built. In these cases, you would need to place a covenant on the land.

Covenants can be both positive and negative, and either give or deny the owner of the property certain rights. For example, this may mean the owner pays towards the maintenance of a shared driveway, or prevents the property being used as a holiday let.

Mortgaged property

If the seller has a mortgage on the property they wish to sell part of, they must obtain consent from their lender in order to go ahead with the sale. Principally because the seller will be effectively reducing the total value of their property by selling part of it and the lender will want to be reassured their interests are adequately protected. This is particularly relevant in repossession cases, because the property will have reduced in terms of its overall size and therefore value.

 Lease extensions

The shorter a lease becomes, the more expensive it is to extend. Leaseholders may even find themselves unable to remortgage and have difficulty selling the lease, particularly to buyers who require a mortgage.

Once an agreement has been reached with the landlord or freeholder, they must provide you with a new lease. The general view is that a new lease, once granted with an extended term, acts as though the original lease has been handed back, or surrendered, to the landlord or freeholder. The Land Registry then registers the new lease, which fully replaces the previous one.

When a leaseholder obtains a new lease, it is also registered against the landlord/freeholders title. This means that if the landlord/freeholder sold the building with your flat comprised within it, anyone who purchases the freehold will receive notice that their purchase includes your new and extended lease.

Mortgage considerations with a Deed of Substitution 

You must ask your mortgage provider to confirm they agree to your lease extension. This is likely to be given as an extension generally represents better security and value for them. To comply with Land Registry rules, you will be required to sign a Deed of Substitution which essentially exchanges your lender’s charge on your original lease for an equivalent charge on your extended lease.

Who processes a Deed of Substitution?

If you have instructed a lawyer or licensed conveyancer, they will complete the Deed of Substitution on your behalf. The form itself more or less states that the old security involving the old lease is being exchanged for the new one. Your advisors will have secured your lender’s prior agreement, which you are required to sign.

What are the alternatives to using a Deed of Substitution?

The Land Registry generally prefers, instead of a Deed of Substitution, the lender to draw up an entirely new mortgage deed. In this situation, the lender must inform the Land Registry on completion that the original mortgage has been discharged.

However, this method is considered more complex and most lenders choose to use Deeds of Substitution instead. Although the choice ultimately depends on the lender.

Many of us, over the past two years, have reassessed our lives. This may include selling off part of a larger plot of land, buying a bit of land to develop, or simply gaining extra garden space. The process is likely to be more complicated that you first think, so discussing your plans with a qualified adviser helps ensure the process moves smoothly, giving you the best chance of achieving your goal.