What are the common types and challenges?
Real estate finance refers to the process of funding property acquisitions or refinancing using a property as security. Like with your standard residential mortgage, money borrowed under a loan will be secured on the property and then used by the borrower for a number of reasons, such as to purchase the property or re-finance existing borrowings.
In order to do their due diligence and ensure that they wish to proceed with the loan, a lender has terms known as conditions precedent (CPs). These form part of the loan agreement, also known as the facility agreement, and are conditions that must be satisfied by the borrower before the lender is obliged to lend. It can be seen as a lender’s checklist designed to ensure that everything is in order before any money is lent.
The loan agreements are usually in the lender’s standard form and so the CPs tend to also be rather standard. The CPs will need to be tailored to suit the specific borrower, the purpose of the loan and any issues identified in the due diligence process, however, there are customary CPs which come up in almost all lending transactions. These include information on the borrower (including their financial information), corporate documentation such as board minutes and written resolutions and any documents required to comply with the lender’s anti-money laundering requirements.
There are also CPs which are specific to real estate finance and some examples of common property-related CPs are as follows:
- A report on title confirming the asset has good and marketable title, usually produced by the lenders lawyers. This would include a review of:
- title documentation;
- property searches such as local authority, utilities and environmental searches; and
- the replies to the standard commercial property enquiries (CPSEs). These include certain important information and documents such as:
- The EPC rating of the property to confirm it is MEES compliant;
- Documents relating to the VAT status of the property; and
- Confirmation as to the planning status of the property.
- Providing copies of any tenancies the property is subject to including a statement of account showing the rental income and where there are any arrears.
- If the property is leasehold, copies of any consent required from the Landlord to charge the property (should the lease require this).
- Discharge of any existing security (including form DS1 and any relevant certificates of non-crystallisation of floating charges). An outgoing lender may also be required to produce a deed of release.
- A valuation addressed to the lender by an independent valuer acceptable to the lender.
- Confirmation that the asset is insured at the correct reinstatement value and further confirmation from the borrower’s insurance broker that the insurance provisions in the loan agreement have been complied with, together with a copy of the insurance policy for the property and evidence that the premium has been paid up to date.
- If the borrower is an overseas entity, there will be further evidence requested in relation to the registration of the company and the VAT status.
All CPs must be satisfied to the level determined by the lender, and therefore different lenders will have different standards of satisfaction. A lender may waive a CP to allow the loan to be made prior to the condition being satisfied either because they do not consider it to be necessary or decide that it can be delivered after the loan has completed (known as a conditions subsequent).
Timing is almost always essential in real estate finance transactions and therefore, it is important to be wary of points that often cause delay in satisfying CPs. These include:
- Third party involvement – if cooperation from a third party, such as insurers or landlords, is required, then this can hold up a transaction.
- Complex corporate structures – if the borrowing company has a complex corporate structure, satisfying the identification and anti-money laundering requirements of the lender can be time consuming. This is particularly true if the company is an overseas entity and there are multiple jurisdictions to consider.
- Valuation issues – valuations are key when it comes to lending, but they can uncover unexpected issues.
All of the above are reasons why it is important to consider the time lines involved.
So, to ensure that a borrower does not encounter unexpected delays or is prevented from borrowing due to any complications, it is important to begin gathering standard documents, such as the property documents and third-party consents, as early as possible.
On the whole, it is clear that CPs are a necessary part of any lending transaction to ensure that the asset has good marketable title and to generally protect the lender. Although many CPs are standard, it does not mean that all lending transactions follow the same formula and depending on the borrower, certain considerations must be made to ensure that the CPs can be efficiently satisfied.
With early planning, clear communication and a pragmatic approach from both sides, most issues relating to the CPs can be managed smoothly and without any excessive delay.
