Loan renewals and security requirements
When you renew a facility, ensuring that the new loan has effective ongoing security is crucial. We regularly get asked whether existing security can be left in place, whether it needs to be confirmed by a deed of confirmation or whether fresh security is required.
Relying on existing security
Where a loan is being renewed and:
1.the loan amount is not being redrawn
2.the facility is not being increased
3.the security is “all monies security” (i.e. the definition in the security documents of the liabilities that security covers is wide and includes all debts owing to the bank at any time and under any document rather than being limited to specific loan agreements)
then, in theory, no additional security is required.
Confirming existing security
However, best practice is to have the security providers enter into an amendment deed which will include the terms of the revised offer and a confirmation of existing security executed by all security providers in addition to the borrower/s (some banks prefer a revised offer agreement and a deed of confirmation instead of an amendment deed). There is particular need for security to be confirmed where there is a guarantor and/or individual providing third-party security as they could try to run an argument that they were not aware that the guarantee/legal charge (as applicable) would extend to future facilities. Guarantees are usually central to the risk assessment of a transaction, so they need to be bulletproof. Therefore, best practice is for the guarantee to be confirmed in the amendment deed and for the guarantor to obtain independent legal advice before executing it.
When is fresh security required?
If the loan facility is being increased or redrawn, fresh security should be taken. This is because security can only secure loans in the contemplation of the parties at the point the security documents are entered into. Unless facility increases are set out in the drafting of the original loan, a very strict interpretation is taken on what sort of increases are within that contemplation.
In these circumstances, fresh security documents should be entered into rather than deeds of confirmation/amendment deeds. The original security is usually left in place as a “belt and braces” approach because it will usually have passed the periods of time (called hardening periods) where security can be set aside by insolvency practitioners in the event the security-giving party becomes insolvent. Therefore, the bank benefits from leaving the original security in place as well as taking the fresh security.
Other CPs
For both deeds of confirmation/amendment deeds and fresh security, the usual ancillary CP documents (corporate resolutions and directors’ certificates) will be needed, and any relevant legal opinions relating to security provider execution will need to be obtained.
Diligence
It is important to check that the existing security has been properly registered and, with respect to any legal charge over UK real estate, that an “all monies” registration has been registered at the Land Registry. A more limited approach can often be taken with respect to real estate diligence where the property has not undergone development or significant refurbishment (and there are no other factors that would have changed the risk profile of the asset).
Often diligence can be limited to reviewing any updates at the Land Registry since the date of the original facility and disclosed by a fresh local search only (as the other real estate search results are unlikely to change significantly). A streamlined approach to diligence can be appropriate for managing loan renewal timing and cost efficiencies.
If you would like to discuss the best ways to structure security or diligence requirements for any loan renewal, please get in touch so we can offer tailored advice based on your specific needs.
