The most common forms of security over real estate are:
A legal mortgage and an equitable mortgage are fixed charges and both create a similar type of security. Both entitle the mortgagee to take possession of the asset and dispose of it with priority over unsecured creditors.
Most borrowing is secured by a legal mortgage. The difference between a legal mortgage and an equitable mortgage lies largely in the extent to which the mortgage is perfected by registration at the Land Registry, and legal and equitable mortgages are treated differently in terms of the rules of priority as against other creditors.
It is also common for security to be granted over the rental income from a property. This usually takes the form of an assignment whereby the tenants are directed to pay the rental income to the lender (usually via a managing agent) so that the rental income does not pass through the hands of the borrower. This assignment can be created by a separate security document but it is more usually contained within the mortgage (or a debenture if one is granted).
A corporate borrower can also create a floating charge. This is a charge over a class of assets which in the course of the borrower's business changes from time to time and which may be disposed of without consent of the lender. This type of charge is sometimes taken with very large and complicated property portfolios where the borrower requires maximum flexibility and the lender is not too concerned over control. However, it is more normal for a lender to take both a floating charge and a legal or equitable mortgage.
A fixed charge over property can be granted by anyone, including companies, limited liability partnerships, English limited partnerships acting through their General Partners, traditional partnerships and individuals. A floating charge cannot be granted by an individual or a limited partnership.
The Loan Market Association (LMA), a trade body for the European syndicated loan market, produces two suggested forms of English law security agreements to sit alongside, respectively, the LMA's Real Estate Finance Investment Facility Agreement and the LMA's Real Estate Finance Development Finance Facility Those suggested forms of security agreement contain fixed and floating charges of the types described above and are frequently used to form the basis of transaction security in UK Real Estate Finance Transactions.
Last modified 22 Mar 2024
Real estate includes the land, buildings erected on it and fixtures which form part of those buildings.
It is also possible to take security over fittings, furniture and moveable objects.
Title to land can be either freehold, leasehold or commonhold (although the last is rarely encountered) although not all leases are considered good security. For instance, short leases at market rent have little value and most leases contain some form of forfeiture clause which allows the landlord to take back the property in certain circumstances. This is not satisfactory if one of those circumstances is the tenant's insolvency.
Last modified 22 Mar 2024
The key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated. The trustees become the owners of the trust property as far as third parties are concerned, and the beneficiaries can expect the trustees to manage the trust property for their benefit. This is well recognized under English law.
Last modified 22 Mar 2024
Debt is commonly traded between lenders. Syndicated lending documentation has, to a large extent, become standardized on the terms incorporated in facility agreements produced by a trade body known as the European Loan Market Association (LMA). These are then negotiated between the parties. In particular, there are two specific English law governed LMA Real Estate Finance standard facility agreement template documents: an investment loan facility agreement and a development loan facility agreement. Each of these is in general use in syndicated transactions in the real estate market in the UK and allows for free transferability of debt between lenders with the security being held on their behalf by a security agent (acting as trustee for the changing pool of lenders from time to time) and the debt being administered by a facility agent. Bilateral loan facility agreements and non-LMA documents usually contain equivalent transfer provisions to those in the LMA documents. However, the ability of lenders to transfer debt to other lenders is a matter for negotiation on a transaction by transaction basis.
In addition, there are several ways of transferring debt being:
Last modified 22 Mar 2024
There are no restrictions on granting security to foreign lenders (in the absence of any issues around sanctions or anti-money laundering concerns).
Last modified 22 Mar 2024
There is no stamp duty payable on creating a security interest. There are also no notaries' fees. English companies and limited liability partnerships, including any English company which is acting as the General Partner in relation to a charge granted by a limited partnership, must register any charge document to which they are a party in order to grant security at the registry of companies, known as Companies House. The fee for registration at Companies House is £23.00 (£15 for online registrations) for each separate charge document granted by each charging company. There is no requirement for security created by non-UK corporate parties or by individuals to be registered at Companies House, but that is not the case in relation to the necessary registration at the Land Registry where registration is dependent on the location of the property in England or Wales and not the jurisdiction of incorporation of the charging company.
A legal charge over land in England and Wales should be perfected by registration at the Land Registry in order to ensure the priority of that charge even if it is granted by non-English or Welsh parties or by individuals. There is a fee payable but it does not exceed £305 for registration of the charge alone (if there is a registration involving both a transfer of title eg to a purchaser who then grants a charge the fee will not exceed £1,105 for registration of the transfer and the charge).
Last modified 22 Mar 2024
Yes, there are both financial assistance rules (which are now of extremely limited application) which may have to be complied with and corporate benefit rules which must be complied with.
It is unlawful for a public company or a company which is a subsidiary of that public company to provide financial assistance for the purpose of a person acquiring or proposing to acquire the shares in the public company. The statutory provisions no longer apply to a private company (except where the shares are in its public holding company). There are various exceptions which may apply and legal advice needs to be taken on the position on a transaction by transaction basis if a public company is involved in the structure of the group receiving the finance.
Directors must comply with both common law rules and provisions under the Companies Act 2006. To summarize, a director of a company must only act in a way that he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole. Further, a director must exercise independent judgment and reasonable skill, care and diligence and act in accordance with the company's constitution.
There are other corporate law issues which include rules relating to capital maintenance, restrictions on transactions between a company and connected parties and provisions relating to transactions which take place within certain periods before the company entering into an insolvency process.
Last modified 22 Mar 2024
There are no restrictions on payments made to foreign lenders under a security document or loan agreement, unless the relevant foreign lender's jurisdiction is subject to any sanctions regime.
A borrower may be required to deduct withholding tax in respect of interest which is payable to a foreign lender depending on the jurisdiction of incorporation of the parties and the application of any relevant double taxation treaties. The allocation of any tax risk is dealt with on a transaction by transaction basis in the facility agreement.
Last modified 22 Mar 2024
A creditor can agree to subordinate its security interest to that of another creditor by a priority agreement, being a Deed of Priority or an Intercreditor Deed. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement.
Last modified 22 Mar 2024
If a choice of law is a sensible choice made in good faith, the English courts will generally give effect to it. It would generally not be advisable to choose a law other than English law to govern a security document under which an English (or Welsh) company creates security over land situated in England or Wales.
If a foreign law applies to a security document which is then sued on before the English courts, those courts will expect the parties to bring evidence as to what the foreign law is on the relevant point and if no such evidence is led will generally assume that the foreign law is the same as English law.
Last modified 22 Mar 2024
Generally, a security interest created by an English or Welsh corporate entity must be registered at Companies House within 21 days. If it is not so registered, it is void against a liquidator or administrator of that entity and against any other third party creditors of it.
Other than a failure to comply with the registration requirement at Companies House, which cannot be remedied later if registration has not been made within the necessary 21 day period, if the security was not perfected because it was not registered at the Land Registry or notice was not served on third parties, this can still be perfected even though the borrower has become insolvent.
Last modified 22 Mar 2024
A holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not itself cause, or knowingly permit, damage to the environment.
Great care must be taken if the security is enforced because owners of land can be liable for environmental damage on that land or coming from it, even if it did not cause such damage. A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability. More often a mortgagee will, under the relevant security documentation, have the power to appoint a receiver under the provisions of the Law of Property Act 1925 (an LPA receiver) to enter into possession of and realize the real property assets on behalf of the mortgagee. As the LPA Receiver is an agent of the grantor of the security and not of the mortgagee the mortgagee avoids becoming a "mortgagee in possession" and subject to the legal risks that would involve.
Last modified 22 Mar 2024
If the facility is on demand, all the lender need do is demand repayment and proceed to enforce the security if that demand is not met.
More commonly, a term loan agreement will describe events of default which must have occurred before the lender can enforce its security. Typical events of default include non-payment of interest or principal, breach of representation, breach of covenant, material adverse change and insolvency.
Once the security has become enforceable, the lender can generally enforce its security immediately. Depending on the nature of the security, enforcement could be by way of appointment of a receiver under the provisions of the Law of Property Act 1925 (an LPA receiver), an administrator or by taking possession.
The security assets can be disposed of by way of private agreement and there is no requirement for public auction, although the lender does have certain duties to obtain a proper price for the assets.
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The principal rescue procedure is for the administration of the company. The administrator takes control over the whole of the company's assets with a view to producing a better result for creditors than if the company went into liquidation. Administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court.
A corporate voluntary arrangement is an agreement between the creditors of a company which typically involves arrangements for reduced payments to creditors. This has to be approved by a majority of creditors together holding more than three quarters by value, although this is not binding on secured creditors.
Last modified 22 Mar 2024
Generally, the onset of a borrower's insolvency does not affect security interests although administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court in the case of a company going into administration. Other moratoria have recently been introduced by the UK Corporate Governance and Insolvency Act 2020 as part of the UK's response to the Covid-19 pandemic.
Security can be set aside in certain circumstances, including where it constitutes a preference or a transaction at an undervalue. Generally, for this to happen, a court order is required and the security must have been created within a certain time period (which can be up to two years (or five years for individuals) depending on the circumstances) before the commencement of the insolvency process.
A floating charge granted by a company within 12 months of commencement of insolvency is invalid save where new money is advanced although, in most circumstances, this provision does not apply unless the company is insolvent when it granted the security or became insolvent as a result.
Last modified 22 Mar 2024
The priority of security interests is determined by a complex set of rules that provide that the order of priorities is largely based upon the date of creation of the security. A summary of the priority order in respect of the key real estate security instruments is as follows:
The holder of a fixed charge is entitled to the whole of the proceeds of sale of that asset without deductions other than the cost of realization.
There are certain prior claims which apply to proceeds of realization of a floating charge. These include:
Unsecured creditors (which will include the UK Government for debts other than those falling within the Crown Preference categories) rank behind secured creditors and rank equally between themselves (the pari passu principle).
Last modified 22 Mar 2024
When a borrower is in default, are there any formalities required or obstacles to be overcome before the lender is able to enforce its security over real estate?
If the facility is on demand, all the lender need do is demand repayment and proceed to enforce the security if that demand is not met.
More commonly, a term loan agreement will describe events of default which must have occurred before the lender can enforce its security. Typical events of default include non-payment of interest or principal, breach of representation, breach of covenant, material adverse change and insolvency.
Once the security has become enforceable, the lender can generally enforce its security immediately. Depending on the nature of the security, enforcement could be by way of appointment of a receiver under the provisions of the Law of Property Act 1925 (an LPA receiver), an administrator or by taking possession.
The security assets can be disposed of by way of private agreement and there is no requirement for public auction, although the lender does have certain duties to obtain a proper price for the assets.
Last modified 22 Mar 2024