Deed of priority

Deed of priority is a tripartite agreement between an existing first-charge UK commercial mortgage lender, an incoming second-charge lender and the common borrower. It records the agreed ranking, gives the second-charge lender contractual visibility into the first-charge loan, and sets out what each lender can do if the borrower defaults.

What the deed actually does

Three things sit at the core:

• Ranking: confirms the first charge ranks senior. Without the deed, the second charge would in principle rank by date of registration, which can sometimes leave ranking ambiguous if the first-charge holder takes further advances.
• Standstill: typically prevents the second-charge lender from enforcing for a defined window after default (say 60 to 90 days), giving the first-charge lender the chance to lead the enforcement strategy.
• Information rights: requires each lender to notify the other of default, enforcement, redemption or any material amendment to the borrower’s facility.

Some deeds also restrict the first-charge lender’s ability to grant further advances that would erode the second-charge lender’s position.

Why second-charge applications stall on this

Two failure modes are common:

• First-charge lender refuses to engage. Some UK clearing banks (less common on the specialist side) decline to sign deeds of priority as a matter of policy. If the borrower’s first-charge mortgage is with a refusing lender, the second-charge route is effectively closed and the borrower must refinance the whole stack.
• First-charge lender takes too long. Even a willing first-charge lender can take 6 to 12 weeks to review and sign a deed. Bridges and short-term second charges sometimes fall over because the underlying purchase or refinance cannot wait.

A worked broker example

Existing first-charge investment commercial mortgage of 800,000 with Lloyds, 18 months into a 5-year fix at 4.7%. Property value 1.5 million. Borrower wants a 200,000 second-charge bridge from a specialist lender at 0.95% per month for 12 months to fund a refurbishment.

The bridge lender requires a deed of priority with Lloyds. Lloyds requires 4 to 6 weeks to review, charges a 1,500 administration fee, and ultimately agrees with a 60-day standstill and quarterly information reporting. The bridge completes 6 weeks later than the borrower originally wanted. The borrower’s refurbishment costs scale up because the contractor’s start date slipped.

The takeaway: factor 4 to 8 weeks of deed-of-priority lead time into any UK commercial mortgage second-charge plan.

See also

• First charge
• Second charge
• Debenture