For banks and lenders, secured lending is a less risky way of allowing borrowing as in the event of a default, recourse can be taken to the relevant secured asset (which is frequently real estate or asset portfolio). However, it is understood that the strength of the security is only as good as the asset itself.
A properly drafted facility letter/loan agreement together with the associated suite of security documents are essential. Below are examples of additional practical considerations we recommend for secured lending when making a loan secured against property.
Practical considerations
Searches
It is good practice to carry out the same due diligence on a security property as would be carried out for a purchase – as a minimum, a local authority search (with optional enquiries), a drainage and water search and an environmental search should all be obtained. If a purchase is taking place alongside the bank lending, the purchaser’s solicitor 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. The indemnity insurance will need to benefit the lender, but keep in mind that this will depend on whether or not the lender will accept search indemnity insurance as some lenders do not.
Planning
Breaches of any planning conditions and/or planning regulations that are still enforceable by the Local Authority will potentially affect the value of the security property. It is therefore important to check the local search result and make appropriate enquiries as soon as possible in a transaction as retrospective consent is often not the solution.
Environmental risk
The fundamental point here is value. 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. Environmental specialises are often reluctant to provide letters of reliance. In scenarios where a letter of reliance can be agreed, this is often expensive to a borrower. Tackling the issue early on in a transaction is time well spent to avoid problems later.
Access
The security property needs to be fully accessible with no ransom strips from the adopted highway, however small these may appear on the title 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, failing which access indemnity insurance is a way forward.
Restrictive covenants
Such covenants are commonly found on titles and even if they are old, can still be enforceable. It is often the case that the details of covenants are not known, for example, if the relevant original document was not produced on first registration of title. In such circumstances, insurance policies are available which will protect mortgagees as well as owners/buyers of the property. It is prudent to check the policy wording and insurance assumptions to ensure that the lender would be protected by the policy wording.
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 on behalf of the lender. 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 charges/restrictions
If there are historic charges noted on the title that should have been released but for some reason were not removed from the title at the time of releasing security, it is important to arrange the discharges as soon as possible. Often there will be delay in reaching out to previous lenders to have title entries removed, which could impact on completion timings of new security.
Overage deeds and s106 agreements
The due diligence aspects of the transaction should reveal whether there are any other agreements/matters affecting the property which are enforceable and may impact value. Any such agreement which is to be put in place, either at the time of, or subsequent to, a legal charge, will require the lender’s consent. 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
Where the security property is leasehold, the terms of the lease should be carefully examined to ensure that there is a sufficient unexpired term of years remaining in the lease in line with the lender’s requirements. If not, a lease extension would need to be agreed. Another point to note is that 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, another point to bear in mind is that a lender 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.
Perfect the security
Once the loan has been 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 an administrator, creditor or liquidator 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. Lenders also apply for an accompanying restriction preventing dealings with the property without that lender’s consent, noting on the register.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
