Investor Considerations
In order to fully protect your position, you will need to obtain the advice of a solicitor with sufficient commercial and/or development property expertise to advise you on the respective deal, undertake all necessary due diligence and draft and complete the necessary legal documentation to ensure that you have sufficient security for the loan.
The manner in which the legals are approached and the legal documentation is drafted is very much a manner of individual taste and circumstances.
Legal Considerations
- Full investigation of title
- Valuations
- All relevant searches
- Replies to Enquiries
- Insurance
- Implication of other financial charges
- Insolvency considerations/transactions at undervalue
- Guarantee documentation for new buildings
- Implication of any tenancies relating to the property
- Occupancy
- Capacity of the Mortgagor to be able to provide the property as security
As the Strata deals are all property based and will, in most circumstances, already have an element of financial backing from a bank, the due diligence on the matter will have already been undertaken by the bank and its solicitors and it may be possible to utilise them. Therefore, your solicitor will need to consider the due diligence that has already been done.
Documentation
The documentation securing your loan should include the following basic provisions:
- Covenant to repay on a specific date or on demand
- Covenant to pay interest
- Charge the property
- Title guarantee
- Description of the charged property
- Extension or variation of statutory powers
- Various Mortgagor covenants to ensure the property value is not affected
- Restrictions on the Mortgagors ability to dispose of the property
- Remedies for default of payment
All the above provisions may be included in one Legal Charge document. Alternatively, the covenants concerning the property itself may be in a Legal Charge document whilst the other provisions concerning the detailed financial arrangements and obligations existing between you and the Borrower can be included in a Loan Agreement.
The Charged Property
In addition to the property itself, the Legal Charge can also include provisions charging:
- The Mortgagor’s fixtures and chattels at the Property
- The Goodwill of any business carried on at the property by the Mortgagor
- Any intellectual property rights of the Mortgagor’s business carried on at the property
- Mortgagor Covenants
- These are a few examples to consider:
- Not to grant new leases and/or accept surrenders without your consent
- Not to make any alterations without your consent
- Not to make any planning applications without your consent
- To enforce all Tenant’s obligations in respect of Occupational Leases and to observe the related Landlord’s covenants
- Not to dispose of the property or grant third party rights without your consent
- To insure the property and apply the proceeds direct to you
- To pay all your costs associated with the loan
Remedies
It is essential that the following remedies are available in the Legal Charge in the event of default by the Borrower:
- The ability to sue
- The ability to foreclose
- Statutory powers of sale including a specific statement that there is an amendment to Section 103 of the Law of Property Act so as to ensure that no notice and arrears are needed to exercise the powers
- The ability to appoint a receiver and/or, under certain circumstances, an administrator.
Deeds of Priority
Finally the priority of the Legal Charge needs to be considered. In light of the fact that there will be in most cases a prior mortgagee, your position must be protected so that if the prior mortgagee makes further advances to the Borrower, your security is not diminished. Therefore, a Deed of Priority should be entered into with the prior mortgagee. This is an agreement with the prior mortgagee confirming that your Legal Charge will take priority before any subsequent advances that they may make.
These ‘Investor Legal Considerations’ have been provided by Massers Solicitors. The information and opinions expressed are not necessarily comprehensive and does not purport to give professional advice
