For lenders, secured lending is a less risky way of allowing borrowing since, in the event of a default, recourse can be taken to the relevant secured asset, which is frequently real estate. However, the strength of the security is only as good as the asset itself.
It goes without saying that a properly drafted charging instrument and associated security documents are essential. Set out below are some of the other practical things that BHW recommends for secured lending when making a loan secured against property.
- Environmental Risk – The key word is value, and an unacceptable environmental report can affect the valuation of the security property. Environmental remediation works are costly and time-consuming. In addition, standard desktop reports can be generalised and unreliable, so lenders should investigate further and, if necessary, refer back to the valuer. This can be time well spent to avoid problems later on.
- Planning – Breaches of any planning conditions and/or planning regulations that are still enforceable by the Local Authority will also affect the value of the security property. It is therefore important to check the local search result and make appropriate enquiries.
- Searches – It is good practice to carry out the same due diligence on a security property as would be carried out in the event of a purchase – as a minimum, a local authority search, a drainage and water search and an environmental search should all be obtained. If a purchase is taking place alongside the loan, the purchaser should have carried out these searches anyway. Depending on the location of the property, other searches may also be appropriate, such as coal mining or additional flooding searches. If the timing of the transaction is such that there is no time for searches, indemnity insurance can be taken out to cover the lack of searches, and such insurance will need to benefit the lender.
- Access – It is an obvious point, but the security property needs to be fully accessible with no ransom strips, however small these may appear on a plan. Determining the legal extent of the adopted highway should be part of your investigation. If there is no direct uninterrupted access to the highway, there need to be legal rights of way instead.
- Restrictive covenants – Restrictive covenants are commonly found on titles and can still be enforceable, even if they are old. Sometimes the details of covenants are not known, for example, if the relevant original document was not produced on first registration of title. However, insurance policies are available which will protect mortgagees as well as owners. Lenders should check the policy wording to make sure they are covered.
- Other charges – If there are prior charges which are not going to be discharged, consents and in some cases deeds of priority will need to be organised. The ranking of charges is critical, since subsequent junior charges will always be subject to the senior charge, and creditors will be paid in that order.
- Other agreements, including overage and s106 etc – Your due diligence should reveal whether there are any other matters affecting the property which are enforceable and may affect value. Any such agreement which is to be put in place, either at the time of, or subsequent to, a legal charge, will need the lender’s consent and, in the case of s106 agreements for example, the lender will be required to be party to the agreement. Specialist legal advice is needed in these circumstances.
- Leasehold properties and properties subject to leases – If the security property is leasehold, the terms of the lease should be properly examined. For example, is there a sufficient unexpired residue of the term? If not, can an extension be agreed? Many leases require consent for charging, so this ought to be obtained from the landlord prior to completion. Ideally, the lease should contain mortgagee protection provisions which require the landlord to first serve notice on the mortgagee before taking steps to forfeit the lease in the event of breach. Where the security property is subject to occupational leases, you should bear in mind that as a lender you may need to enforce the terms of such leases in the event of taking possession. It is therefore important to check that any such leases are properly drafted, contain tenant covenants to repair and pay rent, and can be forfeited in the event of breach or insolvency.
- Occupiers – Where there are adult occupiers of the security property who are not party to the security documents, their written consent needs to be obtained. This consent is to the creation of the charge, to ensuring the occupiers’ interests are postponed in favour of the lender, and that vacant possession of the property can be obtained in the event the lender becomes entitled to enforce its power of sale.
- Perfect the security – Once the loan has drawn down and the legal charge has been signed and dated, it is important to ensure it is properly registered. Sometimes this task forms part of the undertakings given by the borrower. Charges given by companies need to be registered at Companies House within the 21-day deadline, otherwise they will be void against a liquidator, administrator or creditor of the borrower company. Legal charges affecting property must also be registered at the Land Registry in the charges register of the property to take effect as a legal mortgage and to bind a future purchaser or lender, and most lenders apply for an accompanying restriction preventing dealings with the property without that lender’s consent.
If you would like any advice in relation to secured lending, please contact Eleanor Rattay of BHW’s Commercial Property department, on 0116 289 7000.
BHW’s Commercial Property team is one of only 10 in the whole of the East Midlands recommended by Chambers and Partners for Real Estate work.
The department is also one of a handful of commercial property practices ranked in the top 200 in the UK by the Legal 500 guide and is described in the 2015 edition as “extremely good.”