You may be considering refinancing or purchasing a property with the assistance of a commercial mortgage. The commercial mortgage process will typically include a valuation, a review of your financial circumstances and a legal due diligence process to establish whether there are any issues that may affect the security.

Eligibility for a Commercial Mortgage

Each commercial lender will have their own eligibility requirements, but are likely to consider the following factors:

  • Property value – lenders are likely to instruct a professional valuation to determine the value of the property.
  • Loan to value – lenders will use the valuation to determine the ratio between the loan and property value. The lower the ratio, the lower the risk to the lender.
  • Financial circumstances – lenders will consider your financial stability and credit records.  They may request copy accounts, projections and bank statements as evidence.
  • Rental income – where a property is tenanted, the lender will want to ensure that the property generates sufficient cash flow to cover the loan repayments. If you occupy the property being mortgaged, the lender may require you to set up a holding company to own the property, and trading company to rent the property. This effectively provides the lender with a guarantee from the trading company that the holding company will be able to meet the loan repayments.

Statutory Requirements

Lenders will want to know that the property complies with all laws and regulatory requirements, such as planning permissions, energy efficiency and fire safety.

Loan Terms

Once a lender has agreed to grant you a commercial mortgage, they will usually issue a facility letter, or loan agreement which sets out the terms of the loan offer.  We will offer advice on the terms, but you should consider the following:

  • Repayment requirements – is this a capital repayment or interest only mortgage? On a capital repayment mortgage, you will be repaying the interest and capital with each payment. On an interest only mortgage, you will only repay the interest, and the initial drawdown (together with any exit fees) will be repayable on the loan expiry. You must therefore ensure that you will have sufficient funds to repay the loan at the end of the term.
  • Repayment dates – will you be making monthly repayments, and will there be any payment breaks?
  • Interest rate – what is your interest rate, and is this calculated monthly or annually? You should ask the lender for projected repayment amounts to ensure that you can afford the repayments.
  • Security required – with real estate finance, there will usually be a mortgage over property, but the lender may require additional security such as a Personal Guarantee or Debenture.  Where a guarantee is required, you may need independent legal advice.
  • Exit Fees – some lenders require an exit fee to be paid at the expiry of the loan. This is often a percentage of the loan amount. 

The Legal Process and Common Issues

Most commercial lenders have a trusted panel of solicitors that they use to advise them on the process. Depending on the lenders requirements, that solicitor may act on your behalf, or the lender may require separate representation.

  • Title checks – we will review your title to check your ownership status and any covenants or conditions that may affect a lender’s decision to proceed. Where there are onerous covenants, we’ll investigate how to mitigate these, such as obtaining title indemnity insurance.
  • Searches – lenders will usually require searches in a similar way to when a property is being purchased. This is because they need to be satisfied that they could sell the property free from any issues in the event that you default under the loan terms. Some lenders will accept search insurance as an alternative. Search insurance is a one off payment, and can often be a quicker and cheaper way to proceed.
  • Due diligence – depending on the use of the property, we will follow a due diligence process to check that there are no disputes affecting the property, and that the property complies with all statutory requirements, such as planning permissions, energy efficiency and fire safety. This can often involve dealing with lengthy Commercial Property Standard Enquiries, which we will guide you through.
  • Completion process – once the lender is satisfied that the property meets its requirements, their solicitor will provide them with a report confirming suitability. You will be required to sign the mortgage documents, and any further security required. On completion, the security documents are dated, and then registered at Companies House if the borrower is a company, and then the Land Registry. 

Timescales

Timescales will invariably depend on the circumstances. Some lenders are accustomed to acting quickly, especially with bridging finance. Where issues crop up as part of the due diligence process, this can also cause delays. When considering a lender, you should speak to them about their usual timeframes to ensure that this meets your requirements.

The best way to make the transaction as speedy and simple as possible is to be prepared. Gather together any planning permissions, building regulations and reports you have in relation to the property. Speak to the lender about their requirements for reports – most lenders will require asbestos reports, fire risk assessments, gas and electrical safety certificates and EPCs. If you do not have these reports, instruct them at the earliest opportunity, as they can take a few weeks.

Next Steps

At BHW, we have a dedicated Real Estate Finance team to help guide you through all aspects of commercial and buy to let mortgages. Refinancing a commercial property can be a valuable way for businesses to release equity and optimise investments. You must consider the costs and implications of a commercial mortgage before reaching your decision to proceed. At BHW, we can guide you through the transaction, and provide tailored, straight forward advice. 

If you would like to discuss commercial mortgages further, contact commercial property partner and head of the real estate finance team, Kate Burlinson, on 0116 289 7000 or email kate.burlinson@bhwsolicitors.com.



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