Chris Williams, Conveyancing Solicitor at Oliver & Co considers the option of bridging finance for property investments and discusses some of the legal considerations
It is becoming more regular for property investors to turn to providers of bridging finance and short-term loans as an alternative to conventional bank finance. Bridging loans can offer a solution and a means to obtaining finance on a secured, short-term basis to enable individuals and companies to carry out portfolio acquisitions, property refurbishment and developments. Bridging finance is also used where a traditional mortgage may not be an option, for example, due to the property in question being uninhabitable at the time of completion of the purchase or refinance.
Some of the main points to note relating to the legal process involved in bridging loans are set out below:
Timescale
Bridging finance is not necessarily a quick option. You should treat promises of release of funds within a short timeframe (e.g. 24 hours) with caution. Funds will only be released by the lender once all legal aspects have been dealt with. It is important to instruct your solicitor at the earliest opportunity as some aspects of bridging finance can take time. For example, property searches (local authority, drainage & water and environmental) are likely to be required, for both purchase and refinance matters.
Bridging finance lenders will usually have their own solicitors who will raise enquiries on the property’s legal title, planning and/or building regulations documentation, and searches. Investigating and resolving any legal issues and providing all replies may take longer than you might expect.
Every lender will have different requirements. On both purchases and refinance matters, the bridging finance lender’s solicitor will raise a separate, often lengthy list of enquiries which may go over and above the normal type of enquiries expected in a transaction involving conventional finance.
Costs
As mentioned above, lenders usually have their own solicitors and often require their legal fees to be met by the borrower. Whilst it is common for the lender’s legal fees to be deducted from the advance on completion, the bridging finance lender’s solicitor will usually require an undertaking from the borrower’s solicitor confirming they will pay their legal fees whether or not the matter proceeds to completion. The solicitor who acts for the borrower would need these funds from the borrower up-front before giving such an undertaking. This often comes as a surprise to borrowers if they are not made aware of this when applying for the loan.
You should also be aware that there may be unexpected or hidden costs. The bridging finance lender may require specialist searches or reports which may not have been budgeted for at the outset. One example which comes to mind is the scenario in which a bridging finance lender required a legionella risk assessment and report. In this case the borrower argued strongly against this requirement on the basis that all the plumbing in the property was due to be replaced during a full refurbishment after completion. However, the bridging finance lender would not change their position and the report had to be commissioned at the borrower’s expense.
Legal documents
In every bridging finance transaction, there will be a bridging loan agreement and a legal charge, as a minimum. The loan agreement will set out the terms on which the loan is offered and will include all the important details such as the interest rate and repayment terms.
Solicitors acting for borrowers will report to them on the terms of the bridging loan agreement and arrange their signature on the document. It is sometimes a requirement of bridging finance lenders that borrowers are seen in person by their solicitor. Whilst reporting on the bridging loan agreement, the solicitor for the borrower will also arrange for the borrower to sign the legal charge, being the document filed at Land Registry to secure the loan against the title register of property.
If the bridging loan is being taken by a limited company borrower there may be additional documents required. For example, a bridging finance lender may require personal guarantees from the directors and shareholders of the borrower company, allowing them to pursue the directors or shareholders personally should the company fail to repay the bridging loan or default on the terms of the bridging loan agreement.
In some circumstances a bridging finance lender may also require a company borrower to give a debenture. A debenture is an agreement in writing between the borrower company and the bridging finance lender that is registered at Companies House. It can give the lender floating security over all of the company’s assets, in addition to the security property. Such a document could restrict a company from granting a debenture to any other lender after registration of the debenture without the bridging finance lender’s consent.
Our team of solicitors at Oliver & Co have many years of experience in working with bridging finance companies and borrowers to ensure that funds become available as quickly as possible. This enables borrowers to meet deadlines and ensures that all loan monies are correctly secured.
If you are currently looking at bridging finance as an option and would like expert advice, call our friendly team today on 01244 312306 or email us at NewBusiness@oliverandco.co.uk and we will be happy to advise and assist you in your new venture.
