Lawyer Discusses Options For Lenders

With Brexit looming, interest rates and inflation starting to rise and general political uncertainty both here and abroad, is there another financial crisis on its way?, asks Ayesha Hasan, partner at Irwin Mitchell.

At the moment this is very hard to predict. Certainly, there does not seem to be any substantial let up in overseas investors investing in the UK real estate market with the weakened pound, slight price adjustments and seemingly stable property market- although the Chancellor may have put the spanner in the works in the Budget when he removed CGT exemptions for such investors. More noteworthy though is that the current situation does not look like 2008 and the years leading up to it.

Unlike 2008, competition for lending is fierce, with a multitude of new alternative lenders in the UK real estate debt market- including challenger banks, peer to peer lenders, insurance companies, debt funds and family offices. As more traditional lenders took a more conservative approach to real estate lending, impacted by increased regulatory capital requirements and internal guidelines governing their loans, alternative lenders have grabbed the opportunity. Loan to value ratios have certainly decreased to those loans agreed in the noughties, providing a buffer to borrowers. And the documentation for real estate loans has been increasingly standardised since 2008 by the Loans Market Association, giving more certainty and predictability. There is now far more transparency with loans and lenders wary of mis-selling of SWAPs and other structured products.

But what should lenders do in the event things take a turn for the worse?

Given the diversification of the debt market, there is more opportunity than ever to find an alternative lender to take on an existing loan or project rather than a default necessarily occurring. Lenders seem generally more open and willing to refinance and restructure.

Secured lenders have a number of enforcement options open to them by virtue of their loan and security documentation (and common law and statute) if their borrower defaults and they require repayment of the loan.

This documentation will set out when and how a lender can enforce its security. Normally this follows either a demand for repayment when the loan is due or a default by the borrower.

• If a lender has a fixed charge over the borrower's assets then it can enforce its security by appointing a receiver to take control over the assets. The duty of a receiver is to the lender and he needs simply to get the best price reasonably obtainable upon selling the assets. This is often the easiest and cost-effective way to realise the assets.
• If a lender has a floating charge, an administrator can take control over the borrower, with a view to producing a better result for creditors than if the borrower went into liquidation. This is a popular option as it creates a moratorium on other enforcement action against the borrower and potentially allows a sale of the business as a going concern, maximising value.
• Where there is a legal mortgage over a property, a lender has a right to possession of that property either by taking physical possession or by applying to court. This is probably the least popular option, as it effectively  become "owner of the property" and will be responsible for all liabilities and administration that go with it.
• A lender may exercise its own power of sale if it has a legal mortgage or pursuant to statute. This is not the most popular tool but a useful one especially where there is subsequent security or agreements entered into to which the lender did not consent.
• In development loan documentation and/or other related agreements there may also be a step in rights in favour of the lender. Whilst potentially a useful tool, lenders have not historically used these rights given they are not developers.
• Where there is a guarantee, either corporate or personal, a lender can call upon this guarantee where the borrower has not paid or performed a guaranteed obligation when payment or performance is due, or if an alternative event of default has occurred, triggering the ability to enforce the guarantee. Often a guarantee can been enforced without making demand or attempting to collect from the borrower first. This is a powerful tool to ensure prompt repayment and also compliance from group companies and/or directors who often provide such guarantees.

Despite the unknowns and unsettled nature of this moment in time, it appears to be business as usual in the UK real estate debt market for now. Perhaps that is due, in part, to the reassuringly wide range of options which are open to a lender in a time of financial crisis?

This article first appeared in CoStar on 8 December 2017