Taking a new loan or refinancing against your commercial property – 5 top tips to make the legal process smoother
With the cost of living crisis continuing to make itself felt and the UK economy not expected to return to its pre-pandemic size until the end of 2024, it is still a very uncertain time for the property market.
For those businesses looking for a bit of financial breathing space to help see them through the next 18 months, it might be that new lending or refinance of existing lending over commercial property offers the perfect solution. And yet – due to the high levels of due diligence which are often required in transactions of this type – the process of taking a secured loan over property is often far from perfect.
With significant experience handling commercial finance transactions for both borrowers and lenders, over a wide range of business sectors and types of property, Associate Solicitor, Charlotte Excell, provides her top 5 tips for overcoming unnecessary delays and stumbling blocks, to help you get ahead in the lending game.
1. Ensure your Energy Performance Certificate (EPC), Fire Risk Assessment (FRA) and Asbestos Report are all in place
These are not only a necessity in terms of safeguarding the occupiers of your property, they are also a statutory requirement.
- The importance of having an Energy Performance Certificate was outlined in this recent article, in which I also explained the reason for having an EPC in the first place, the everchanging laws and regulations surrounding EPCs and the financial impactions and penalties of failing to comply with the same.
- Under the Regulatory (Fire Safety) Reform Order 2005 there is a duty on the “responsible person” (i.e. anyone who has control of a non-domestic property) to ensure that a suitable and sufficient Fire Risk Assessment is undertaken to identify any fire hazards and risks within, with further regulations recommending that this must be routinely reviewed.
- If your property was erected prior to 2000, there is a high possibility that some of the building materials will have contained asbestos. As the owner of a commercial property, the responsibility is on you to manage any asbestos in your property so, for any properties constructed after August 1999, an Asbestos Report should be commissioned to determine whether the property contains asbestos, and if so, to offer recommendations on how you effectively manage the same.
Not having the correct assessments, procedures and surveys in place for any one of these issues could of course be costly on many levels. However, in terms of progressing a loan application on a commercial property, these are all things which major lenders will identify as high-risk concerns and, on undertaking a valuation report of your property, they will likely be flagged as a requirement to be reviewed as part of the legal due diligence before lending.
2. Make sure any existing leases and tenancies are legally compliant
If your property is tenanted with either commercial or residential tenants (or potentially a mixture of both) your lender will likely want to see and review the appropriate lease agreements and/or tenancies that are in place or to be put in place as part of the lending conditions, along with any further documents that are annexed to or associated with the said tenancy such as rent deposit deeds, licences and any plans or drawings. These aren’t usually ‘deal breakers’ for the lender, but can lead to unnecessary delays if it is discovered during the course of due diligence that there is an issue with any of these documents (either in the drafting or possibly the registration) which may pose a risk to the lender’s security in the future. Far better to review these documents with your legal advisor ahead of time so you can “flush out” and remedy any potential issues before they reach the hands of your lender.
3. Make sure you have appropriate buildings insurance in place
Lenders will insist that the correct buildings insurance policies are taken out and reviewed so as to meet their requirements before they give you a loan. The purpose of buildings insurance is to cover the cost of repairing or rebuilding your business premises if damaged or destroyed, and lenders will insist on it as part of their application criteria.
You should always insure your commercial premises against the full cost of reinstating the property, not just its sale price or current market value.
4. Check that all necessary third party consents and approvals have been obtained
If you occupy your premises under a lease or long leasehold, the consent of your landlord is likely to be required in order to secure the lender’s charge against that lease. The same applies where third parties may have benefits or rights of access and/or use over your property as noted on the title documentation and deeds.
It can quite often be a challenge to obtain such consents or approvals, as landlords and third parties have no real vested interest or concern in granting the same and it’s not uncommon for these to be unreasonably delayed or withheld. The sooner such a request is made and regularly followed up the sooner the consent is likely to be obtained.
5. Be prepared and organised from the get-go
In today’s property market there is no such thing as a ‘one size fits all’ approach. Different lenders will have different requirements and different applications will involve different criteria and conditions. As such, it is better to get your ducks in a row from day one, with all documentation relevant to your property in one place, so that, when requested, you don’t have to start hunting around for everything – you will have it all to hand, ready to be reviewed and reported on. This includes any documents you received in connection with the property when you originally purchased it, any planning permission you obtained following subsequent works at the property and any renewal policies recently taken out.
For further information or advice on any of the issues covered in this article, or for assistance with any other commercial property matter, please contact Associate Solicitor, Charlotte Excell, by phone on 0191 384 2441 or by email at cbe@swinburnemaddison.co.uk.
This article is for general information only. It does not, and is not intended to, constitute legal or professional advice. The law may have changed since this article was published and we would always recommend that you seek specific advice on any particular legal issue.
