Section 105 Law of Property Act 1925

This section deals with the application of the proceeds of sale from a property sold by a mortgagee in possession. The section is quoted below:

"The money which is received by the mortgagee, arising from the sale, after discharge of prior incumbrances to which the sale is not made subject, if any, or after payment into court under this Act of a sum to meet any prior incumbrance, shall be held by him in trust to be applied by him, first, in payment of all costs, charges, and expenses properly incurred by him as incident to the sale or any attempted sale, or otherwise; and secondly, in discharge of the mortgage money, interest, and costs, and other money, if any, due under the mortgage; and the residue of the money so received shall be paid to the person entitled to the mortgaged property, or authorised to give receipts for the proceeds of the sale thereof."

The highlighted part is what I want to discuss as the rest is quite standard.

When a mortgagee sells a property and is left with a surplus following redemption of its charge, where should it be sent? If there is a second registered legal charge, this is usually simple. The surplus should be sent to the second mortgagee or its representatives.

In my opinion, the situation is not as simple when the next registered entry is not a legal charge. Some interpret the above highlighted passage to mean that they are entitled to simply pass the surplus to the proprietor of the next registered entry. I do not agree.

If the next entry is a Restriction pursuant to a Charging Order against the beneficial interest of one of two owners, does the beneficiary of the Charging Order qualify as being "entitled to the mortgaged property"? In my view it does not. The beneficiary's interest is in the proceeds of sale of the interest of the debtor in the property.

For example, let us say that Mr and Mr Smith own the property as joint tenants. There is a first legal charge to Bank X. Bank...