Companies, Partnerships and Directors
Loan security using property
Property owners looking to raise funds for business investment, re-financing or buying more property may consider using their existing property as collateral. "Real estate finance" or "secured lending" is a complicated procedure and property owners need to understand all the implications.
In today’s market it can be difficult to borrow money on good terms, or even to borrow money at all. Lenders are looking for strong credentials and assurance that the loan can be repaid if the property is sold. This will essentially include evidence of the value of the property to be used as security, which will then be compared to the value of the loan. They will also consider any cash flow generated by the property so that the lender can ensure that the loan repayments will be met.
It will most likely be a pre-condition of the loan that you have a formal valuation of the property carried out, and not just a desktop valuation, this may also include details of any tenants, rent payments and arrears.
Your solicitor will also need to review your valuation, which will have a separate section on legal matters to consider, and report any concerns to your lender.
You will need to provide a "report on title" to your lender. Your solicitor then carries out a review of the title to your property and confirms to your lender that it is suitable for lending purposes. This will generally mean that your title must not contain any restrictions or other imperfections which have the potential to affect the value of the property. For example, if you are planning to develop your property and to change its use from residential to commercial, you may need to provide evidence that you have obtained the necessary planning consent and there are no restrictions in the title or restrictive covenants against the new use.
As part of the report on title you will need to have searches of the property carried out. The standard searches will reveal if, there are any environmental issues to consider, what services are connected to the property, whether there are any planning developments near the property, such as road or railway proposals that may impact on your current or proposed use of the property. Any matters affecting the property must be disclosed to your lender.
If you already have a mortgage on your property you will need to seek the consent of your existing lender to a second mortgage. If they agree then you will need to disclose the existence of your first mortgage to your new lender if you have not done so already.
Your new lender may not agree to act as a second mortgagee as this means that in a default or insolvency situation, their interest in your property is deferred and they will only get paid if there are sufficient funds after the first mortgage has been paid.
If you have the consent of your existing lender, and your new lender agrees to be a second mortgagee, you will need to agree the terms, usually contained in a "deed of priority". Many lenders have their own form of deed depending on the value of the loan and the specific details of the transaction.
The specific terms of your finance arrangement with the lender will be set out in a separate document, usually a facility letter or agreement. The terms of your new mortgage will incorporate these terms and the lenders standard banking terms. This will include obligations on you to make the loan repayments, to keep the property in good repair, not to make any alterations to the property or to grant leases or enter into further charges without your lender’s consent. These obligations are to ensure that the value of the property is preserved.
You will also need to consider all tax liabilities in connection with your investment. If you are buying property, you should consider what your stamp duty liability will be and any tax treatments in respect of rent payments, including the payment of VAT, and where you make a profit on the sale of any property any capital gains tax liability.
The above is only a summary of the main considerations in dealing with secured lending. It is important that you take independent legal, valuation and financial advice before entering into any commercial loan arrangement from an experienced commercial property lawyer.