Corporate Finance Associates Blog

Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?

The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever.  Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.

It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past.  Three principle areas come to mind:

• Financial covenants associated with a loan
• Personal guarantees
• All Monies clauses

Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility.  When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.

We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.

Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.

Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.

What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower.  In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.

When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.

Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong.  So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all.  As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.

So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!

If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them.

Surveyors expect to see rent rises in the New Year as the number of rental properties coming onto the market fell for the first time since January 2008, says the latest RICS Lettings Survey.

The following from the RICS Website -

Shortage of new instructions bolsters rental outlook

• Tenant demand picks up speed but the new instructions net balance turns negative for the first time since the early part of 2008
• Downward pressure on rents appears to be easing with the forward looking rent expectations series moving smartly back into positive territory
• London is leading the turnaround in rental expectations followed by the North and the South East

Tenant demand for residential property picked up speed in the three months to October. A net balance of 16% more surveyors reported a rise in new tenant lettings over this period compared with 11% in the previous three months.

Within this aggregate figure, demand picked up particularly sharply for the renting of houses; the positive net balance in this sector of the market jumped from 6% to 22%.

Meanwhile, the net balance of respondents recording a rise in demand for flats remained unchanged, albeit still in positive territory, at 12%. More significantly, the latest survey shows the new instructions net balance to have fallen for the first time since the early part of 2008.

The Full Link to the RICS Survey download 

When times get tougher (and sometimes even when they are not) ours and subsequently lenders’ suspicions are aroused when something obviously isn’t right with the proposition we are presented with.

It is to be expected therefore that we need to ensure that relevant checks are undertaken to ensure what we are seeing is the correct picture, indeed the Money Laundering Regulations (MLR) require that we are on top of our game in this regard.

All secured lenders are vulnerable in two key areas, defective valuations and fraud – although sometimes the fraud can be linked to the valuation. 

In most cases it is difficult to prove that a valuation is fraudulent as opposed to negligent. However, a common theme is that a non local valuer or one man band has been used to value the security property.

Lenders now insist that they instruct their own valuer and valuation report as it is the only way they can control the situation, and this is often backed up by their own due diligence methods including their local representative doing a “Drive by” assessment, Land Registry Searches (they only cost a few pounds after all), and reference to tools such as Google Earth.

Where the lender is asked to use an existing valuation as the basis for a new valuation, most, along with these additional checks, try to ensure that the valuer is local to the property.  Rewriting existing reports is a very grey area at the present time, most lenders don’t accept them and more and more, as valuers try to maximise their own fee income, they themselves won’t agree to undertake them.

The other area to be aware of is that most lenders have a point (not often advertised) at which they look for a supporting auditing valuation from another valuer.  Anomalies can often be found when these two opinions are then considered.

Ensuring that the borrower is who they say they are and that they have the ability to deal with the property is the other big challenge.

As part of the various Know Your Customer (KYC) processes we and the lender, require certified copies of the borrower’s UK Passport and two original, recent utility bills. These can then used to verify the borrower’s ID electronically.   Photocopies are NOT acceptable, and when we see them alarm bells can start ringing.  I remember a seminar put on by one of the main UK lenders where we were all shown very, very good copies indeed, of payslips, bank statements and utility bills, and they would fool a lot of people less diligent.  These were actual documents the lender had received in support of real Buy to Let applications.

The relationship between the borrower and their solicitor is also considered. Comfort is obtained where the solicitor confirms that they have acted for the borrower for a number of years. Conversely, if the borrower is unknown to the solicitor and/or the solicitor being used is not local to the borrower, then further investigation may be required.

All the above information is then considered in the context of the application.

An example from one of the lenders we work with attests that sometimes peculiarities leap out.  

“One such case was a borrower living in a scruffier part of Manchester buying a property in Holland Park and – here’s another suspicion raiser – using solicitors in Leicester!”

 “A quick check at HMLR revealed that the borrower’s residence was owned by his partner and a Companies House check on his alleged employer revealed there was no way – according to the accounts at least – that he could be earning his stated salary”.

Needless to say that application was quickly rejected. – Thankfully it wasn’t one of ours.

In order to prevent fraud, lenders are advised to verify the ID provided; ensure the valuers are local to the security property (and if not, ask why not) and establish the connection between the borrower and their solicitor.

Finally, and perhaps most importantly of all, there’s the “gut feeling” that comes from many years of experience and a general intuition that puts us on our guard.  Just questioning whether the reason for the loan makes sense in the first place, how it was introduced to us, if it will cost more to move than stay put,  what is the underlying reason, does the borrower, their stated income and occupation, their residence, the activity shown in their bank statements all tie up together?  After all, if these questions can’t be answered and the lender doesn’t have a clear understanding of who they are lending to and why, it is probable that the loan application will be turned down

Everything we do is encompassed in KYC, observance of MLR guidelines but underpinned by still treating our customers fairly, but if our help is required these areas have to be right.