What is a Deed of Substituted Security?

A Deed of Substituted Security is a document that enables a lender's charge on an existing title, for example, a bank's charge on a property, to port to a new one. This scenario is possible, provided the charge is of the same or greater financial value.

A Deed of Substituted Security is mainly used in lease extensions and transfers of part. Note that for both of these, the value of the property in question changes, but the lender would still wish to maintain whatever financial interest it has in the property in full.

Are you looking to extend your lease? This article explores how a Deed of Substituted Security is used when extending a lease and how it affects the registration of title at the Land Registry.

In what situations are Deeds of Substituted Security often used?

Deeds of Substituted Security are often used in non-residential/commercial transactions. Two highly common situations where a borrower might wish to substitute security in a property finance transaction are:

• If the lender has taken security over a portfolio of properties, it may have agreed with the borrower to include a mechanism in the loan and security documentation whereby properties in the lender's security package can be substituted for alternative properties
• Where the borrower operates a business with a changing portfolio of investments, for example, an investment fund, the borrower will be under commercial pressure to act swiftly when looking to acquire or dispose of properties and will want the ability, under its financing and security arrangements, to dispose of properties and replace them with new ones

Other reasons for looking to substitute security may be to release capital (whether to the borrower as equity or to the lender by enabling part repayments of debt) or to allow for a non-performing property asset to be replaced by a superior asset that will ensure ongoing compliance by the borrower with the loan documentation and maintain the value of the lender’s security package.

Why do you have to grant a new lease when extending?

Once you've concluded terms with your landlord/freeholder for a lease extension, your landlord actually has to grant you an entirely new lease on your flat.

This might reasonably strike you as unnecessary - why wouldn't you just add a short document to the original lease contract saying that 90 years had been granted to the original lease, for example?

In fact, this is how things were done, with a few standard words written on the back of the original lease. However, this has now completely changed.

The existing lease has to be handed back first

The Land Registry views that a new lease granted with an extended term acts as if the original lease has been handed back - or 'surrendered' - to the freeholder. This applies whether you've taken the informal or the Section 42 Formal Route to your lease extension.

When your property lawyer has completed the extension lease, they have to apply to the Land Registry for registration of the new lease, which will fully replace the old lease.

What about your mortgage and your lender's charge on your property?

You have to ask your bank to confirm that they agree to your extension. For reasons mentioned above, this will invariably be given as the new extended lease represents better value and security for them.

In order to comply with the Land Registry's rules, however, you'll have to sign a deed of substituted security, which effectively exchanges your lender's charge on your old lease for an equivalent charge on your new lease.

Which parties process Deeds of Substituted Security?

Your appointed property lawyer completes the Deed of Substituted Security on your behalf; it's a simple enough form and, more or less, states what's been described: that the old security under the old lease is to be exchanged for the new one.

What alternatives are there to using a Deed of Substituted Security?

The Land Registry actually prefers, instead of a deed of substituted security, that your lender create an entirely new mortgage deed. In this situation, your lender has to notify the Land Registry on completion that the original mortgage has been discharged. This method is considered more complicated, and most lenders opt to use deeds of substituted security instead; however, the choice ultimately depends on the lender.

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• RICS Surveyor Negotiations.
• Complicated jargon made simple.
• Preparation and serving of Section 42 Notice.

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