We are all used to problems cropping up during the course of a property deal, so the ability to mitigate these as much as possible in advance can be crucial.
An increasingly regular issue seems to be that of insurance broker letters. Engaging a broker at the earliest opportunity in a deal is key. We have seen letters still being negotiated right until completion, only for the lender and insurer to remain at odds leaving the borrower to find expensive last-minute alternative cover. Borrowers and lenders alike should ensure their solicitors begin the dialogue between lender and broker at the earliest opportunity, although we would hope this to be the case in any event!
We are often instructed to act for lenders and borrowers at the stage where a transaction has already exchanged and there is a tight deadline for completion. This doesn’t leave much room to manoeuvre if any loose ends were not tied up at exchange, but we have seen deals run far too close to the wire and even collapse because of such issues. For example, a borrower may exchange using its own funds with a lender lined up to finance completion. In such cases, it can be easy not to concentrate sufficiently on the finance terms at the outset as the focus is on exchange. However, if a lender is not fully aware of the potential problems a property may present (i.e. those which may negatively impact value and ultimately a lender’s credit terms), it is not unknown for a lender’s credit team to pull the plug at the eleventh hour because the deal no longer sufficiently reflects the original terms. It is key then for a borrower to be as confident as possible in a lender’s full understanding of the underlying transaction, as this will underpin the ultimate credit sanction. Glossing over problem areas such as ambiguous access rights to a property, restrictive covenants or proper authorised use could be very costly later down the line.
Touching on the above, it is important to remember that a lender is always looking at a property finance transaction from the angle of whether or not they would have adequate security if ever faced with enforcement. In development finance, any related planning permission is of course critical. Too often we see differences in understanding between a borrower, valuer and lender as to the exact extent of planning consents. As solicitors, we should always pick up on such discrepancies at the earliest opportunity, but even if this is the case, this is often at a very advanced stage in a transaction where a key change to the understanding of a planning consent or correct use class of an intended development could cause a significant adjustment to value.
Lenders should be just as alert as borrowers to clearly understanding the extent of a proposed development and exactly how that tallies with the associated consents. If a lender or borrower has any doubts over such issues, there is no harm in seeking a second opinion from their legal adviser, even in the early stages. This is especially true as we have seen even very recently that not all planning problems are insurable or capable of gaining the comfort of a lender or their credit committee – problems which can prove fatal to a deal.
As with most things, it is always crucial to try to foresee as many of the potential issues in a deal as far as possible in advance. This applies no matter what role you have in a transaction, so we will always be happy to discuss any concerns.
Daniel Whebell, Associate, Fladgate LLP (firstname.lastname@example.org)