Security release documentation
On repayment of a loan, a borrower will be entitled to formal release of all security held by the lender. This should be documented by way of the most appropriate release document, which will vary depending on the secured assets in question, the type of security being released and its governing law.
Security over land or heritable / freehold property
For Scottish security over land, the only method of validly releasing this is by way of a discharge of standard security. This must follow the statutory form of discharge, which is contained within the Conveyancing and Feudal Reform (Scotland) Act 1970. For security over English real property, a Form DS1 or Form DS3 should be obtained.
Where the release is taking place as part of a property sale or purchase, the purchaser may also request a letter of non-crystallisation in relation to any floating charges held by the existing lender.
Security over other assets
Other types of security, such as floating charges, assignations or assignments in security or share pledges, can be released by a simple deed of release. In addition to formally documenting the release of security, this will typically include the release of contractual obligations under the loan and security documentation, revocation of powers of attorney or proxies granted under the security, and confirmation of who is responsible for the costs of the security release (typically, the borrower). Lenders may also sometimes look to include anti-insolvency clawback wording. Where the release is being executed by a security agent or trustee, they may look to include their preferred limitation wording.
Assignations in security (for example, fixed security over rental income or rights under construction documents or other contracts) require to be released by re-assigning the rights back to the borrower. This is known as a retrocession or re-assignment, and can be a standalone document, or included in a wider deed of release.
English security is typically released pursuant to an omnibus or global deed of release which covers the same points as described above for a Scottish deed of release.
On a cross-border transaction, the same deed of release can usually be used to release both English and Scottish security (with the exception of securities registered at the Land Registry or Registers of Scotland which must follow required forms). However, this could have an impact on document execution, and care should be taken in order to ensure the release meets the requirements of both Scots and English law where required.
Perfection steps
Generally, perfection of security release is the responsibility of the borrower. Where the release forms part of a wider refinancing, the incoming lender or their counsel may. However, wish to have some involvement in the process. Once the lender has signed the security release documentation described above it won’t generally have any further involvement in the release mechanics. Any documents of title (such as title deeds or share certificates) should be returned to the borrower.
Standard security discharges are required to be registered at the Land Register of Scotland (or, for older standard securities, recorded in the General Register of Sasines). This removes the standard security from the property’s title or search sheet. In England, when security over land is released a similar application will need to be made to H.M. Land Registry in order to clear the security from the title.
Re-assignations of assignations in security (or, in England, assignments in security) must be intimated to all relevant third parties. For example, if an assignation or assignment in the security of rental income is released, the tenants of the property must be notified of the release for it to be effective.
For perfected share security, a stock transfer form will be required to transfer ownership of the shares back to the pledgor, and the register of members of the company whose shares were secured will need to be updated to reflect that the security has been released. If, as is common in England, when unperfected share security is taken, the lender has instead simply taken possession of a blank stock transfer form and the original share certificate, then these will need to be returned to the chargor when the security is released.
In both Scotland and England, where security has been registered at Companies House, once released this should be marked as satisfied by submitting a completed form MR04 or MR05 (as applicable).
Closing considerations and timing
If the loan is being redeemed as part of a refinance, it is likely that the incoming lender will wish to approve the release documentation before it is signed. The incoming lender should be engaged early to avoid unnecessary delay to completion. If a security agent or trustee is involved in the release process, the same principle will apply.
It is likely that completion undertakings will need to be agreed between the solicitors acting for the borrower, incoming lender and outgoing lender. These will contain undertakings covering transfer of funds to the outgoing lender, delivery of the original release documents and (if required) service of any required intimations or notices to third parties. The use of solicitors undertakings gives the outgoing lender comfort that the loan will be redeemed, and gives the incoming lender comfort that the existing security will be released (meaning that any assets are free to be secured to the incoming lender as part of the refinance).
Completion arrangements will sometimes involve release documents being signed in advance of closing and held in escrow (in England and Wales) or as undelivered (in Scotland). Care should be taken to ensure that the correct release and delivery mechanisms are used for the relevant release documents.
Common pitfalls
Security release on redemption of a loan is usually a straightforward matter, however there are a number of factors lenders and borrowers should bear in mind to ensure smooth completion.
The parties to the security release document may seem obvious, but care should always be taken to check that title to the security has not transferred to another party (perhaps as a result of internal bank ring-fencing, or because on a syndicated deal there has been a change of security agent) and that the chargor has not changed its registered name. Errors in designation of parties will lead to issues in identifying whether or not the release is effective and with registering security releases. For example, the Registers of Scotland have rules on party designations which must be complied with if a discharge of standard security is to be accepted for registration.
Banks and financial institutions often have their own internal rules regarding who can sign security release documentation, which need to be considered in addition to the rules on document execution more generally (on which, see here and here). Always check that the signatory or signatories are authorised to sign release documents. Where the party involved is an overseas entity, Land Registry and Registers of Scotland requirements may require evidence of authority or authority to be narrated in the signing block itself.
Finally, parties should ensure that all documents and steps required to perfect the releases (whether notices / intimations, stock transfer forms, other forms or documents of title) are so far as possible agreed ahead of completion and responsibility for perfection steps clearly allocated.
If you have any questions regarding any of the above, please do not hesitate to contact one of Banking and Finance team.