Contributed By Hawkins Hatton Corporate Lawyers Ltd
Acquisitions of commercial property are generally financed by lending from institutional banks/lenders. However, many companies are also able to purchase property from their own available resources without the need for any finance.
There are also a number of private companies that offer finance to developers in order to assist with projects and development opportunities.
A lender will require a first legal charge to be registered against the property as security for the loan which is advanced.
If the purchaser of a property is a company then the lender will usually also require a debenture over the company’s assets. If a holding company (ie, a company which does not trade) purchases a property then a lender will usually require a lease between the holding company and its trading company so that the monthly payments under the mortgage can be secured.
The UK does not currently have a domestic legal framework that specifically governs inward foreign direct investment (FDI).
FIRRMA is intended to address concerns in the US about foreign investment and access to sensitive US technology, especially by Chinese investors. It will achieve this by expanding the role of CFIUS in reviewing transactions which raise US national security concerns in relation to foreign investment or acquisition of certain US businesses. This will inevitably provide further obstacles to foreign investment in the US, including investment in real estate.
A modest fee is payable to register a security over a property or a company. This fee is payable to either the Land Registry in respect of a legal charge/mortgage or Companies House in relation to a debenture or charge over shares. Additionally, enforcement of security would attract court fees and legal fees.
Before an entity can give valid security over its real estate assets, a private company director will need to have regard to his/her director’s duties and whether any transaction is for the company’s benefit and that the company is solvent pursuant to the Companies Act 2006. If corporate benefit to giving security cannot be established, a director could be in breach of his/her duties to the company. Directors are encouraged to record the basis of their decisions in board minutes and to identify the corporate benefit. It is also advisable to ask the company’s auditor to confirm the company’s solvency.
Provided the lender has secured its mortgage through registration of a legal charge against the property asset with the Land Registry, there are usually no obstacles to seeking to enforcement in the case of a default. A lender will usually enforce the security by the appointment of an LPA receiver who will manage the disposal of the property asset and repayment of the debt (together with cost of realisation) from the sale proceeds.
At the point of enforcement, no further steps can be taken to give priority to the lender’s security above those of other creditors. Priority of security is a matter to be addressed at the time of the lend by virtue of a deed of priority.
The rules governing the priority between two different security interests over the same asset vary for different types of assets.
In order for a particular security interest to take priority over an earlier security interest, one or a combination of the following circumstances usually apply:
Secured creditors will usually agree priority of their respective secured interests contractually by virtue of a deed of priority, which will rank the priority of the secured interests on enforcement.
A lender cannot generally be liable for environmental damage unless it is responsible for the cause or knowingly permits the damage. A lender does, however, need to be mindful if at enforcement it takes possession of the property, as it may then have a liability relating to any environmental issues as an owner of the contaminated land or a knowing permitter.
Secured interests of a lender are not affected by the insolvency of a borrower. However, during an administration a lender may not start or continue legal proceedings against the company and/or enforce security without leave of the court.
The London Interbank Offered Rate (LIBOR) is to be replaced by the end of 2021 with “a more reliable alternative” according to the head of the Financial Conduct Authority (FCA), Andrew Bailey. Movement away from this deep-rooted mechanism is likely to cause disturbance to a broad range of individuals and companies around the world that base their finances on LIBOR. Current contacts may maintain LIBOR in the short term, whereas it seems new contacts will adopt Sterling Overnight Index Average (SONIA). Borrowers must start to consider the effects new benchmark rates could have on their property portfolios/investments to secure a smooth transition from LIBOR. The landscape is somewhat uncertain at this stage but as the deadline approaches borrowers will be better equipped to manage the risks.