If your commercial mortgage is coming to the end of its term, the legal work is usually what decides whether the new money arrives on time.
A lot of commercial property loans are coming up for renewal at the moment. Many were agreed in 2020 or 2021 on five-year terms, when Bank Rate was 0.1% and lenders were competing for business. The Bank of England held Bank Rate at 3.75% in September, inflation is heading back up, and lenders have become noticeably more careful about what they will lend against and on what terms.
For landlords, investors and owner-occupiers across Greater Manchester, that means two things; the new loan will almost certainly cost more than the old one, and the lender will want to look much more closely at the property, the leases and the borrower before it releases funds. Most of that scrutiny lands on the legal side, and in our experience it is where refinancing deals can slow down.
This article explains what a lender will ask your solicitor to confirm, the problems that most often cause delay, and what you can do now to make the process quicker and cheaper.
Why refinancing is harder than it used to be
Five years ago a borrower with a decent property and a reasonable rent roll could refinance without much difficulty. The picture now is very different for a number of reasons.
Interest costs are higher, so the same rent supports a smaller loan, and lenders test whether the rent comfortably covers the interest, and at today’s rates a property that easily passed that test in 2021 may not pass it on the same loan amount. Values in some sectors have also moved, particularly secondary offices and retail, so the loan-to-value figure that worked before may no longer work either.
On top of that, lenders are paying far more attention to energy performance and to the quality of the tenants and leases, as well as to the borrower’s own structure. The result is that refinancing has become a proper due diligence exercise, and the borrower’s solicitor has a much bigger role in getting it over the line.
What the lender’s solicitor will want to see
When a lender agrees to refinance, its solicitors will carry out their own investigation of the property, or ask your solicitor to certify the position on their behalf. Either way, the same questions come up, and these are the ones that we think matter most.
Clean title
The lender needs to be satisfied that you own what you say you own and that there is nothing on the title that would stop it selling the property if it ever had to. That means up-to-date Land Registry entries, a clear explanation of any rights of way or restrictive covenants, and confirmation of how the property is accessed and serviced. Problems that were glossed over when the property was bought, such as an unregistered strip of land or a missing deed, have a habit of resurfacing at this point.
The leases and the rent roll
For an investment property, the leases are the security. The lender will want to see every lease, know when each one expires, whether there are any break clauses coming up, when rents are next reviewed and whether the tenants are actually paying. It will also want to know about anything that is not in the lease, such as a side letter agreeing a rent concession, or a tenant who is in occupation without any written agreement at all.
Our articles on break clauses and on the ban on upward-only rent reviews explain why these points affect the value a lender puts on your income.
Planning and building regulations
The lender will ask for confirmation that the current use of the property is lawful and that any alterations or extensions had the consents they needed. A unit that has drifted from one use to another over the years, or a mezzanine that was put in without building regulations sign-off, can hold up a refinance until the position is regularised or insured.
Energy performance
Commercial property cannot generally be let with an energy rating below E, and lenders now treat the EPC as a measure of risk in its own right. A property with a poor rating, or one where the certificate has expired, may attract a lower loan or a condition that improvement works are carried out. The Government has consulted on tougher standards for larger buildings, and lenders are already pricing that in.
The borrower and any guarantors
If the property is held in a company, the lender will want the company’s constitutional documents, board approvals for the borrowing, and usually personal guarantees from the directors. Where the property is owned by a group, or sits in a special purpose company set up for the purchase, the structure needs to be explained clearly. This is the point at which corporate and property law meet, and it helps to have both handled by the same firm.
Searches, insurance and the practical points
Fresh local authority, drainage and environmental searches will normally be required, along with evidence that the building is insured for its full reinstatement value with the lender’s interest noted. If there is asbestos, a fire risk assessment or an occupational health and safety issue, the lender will want to know how it is being managed.
What most often causes delays
Refinancing can stall because of loose ends, and we see the same ones come up again and again.
- Leases that were never properly completed, or tenants who moved in on a handshake, which leave the lender unable to rely on the income
- Alterations without consent, whether that is planning consent, building regulations approval or the landlord’s consent under a headlease
- Title defects that were insured or ignored at purchase and now need a fresh indemnity policy or a proper fix
- Out-of-date or missing EPCs, which are easy to sort but only if someone checks early
- Existing lender delays, where the redemption statement arrives late or early repayment charges have not been factored into the numbers
- Company housekeeping, such as filings at Companies House that are out of date, or a charge from an old loan that was never released
Every one of these can be fixed, and the point is that fixing them after the lender has raised them takes weeks, whereas fixing them before the application takes days.
Reading the new loan before you sign it
The offer letter and facility agreement deserve as much attention as the property. The interest rate is only part of the picture. A borrower should understand the loan-to-value and interest cover tests the lender will apply during the loan, because a fall in value or the loss of a tenant can put you in breach even if every payment has been made. It is worth knowing how much you are personally guaranteeing and whether that can be capped, what the early repayment charges are if you sell or refinance again, and what the lender can do if a tenant exercises a break.
These points are negotiable more often than borrowers assume, particularly with challenger banks and specialist lenders, and an experienced solicitor will know which ones are worth pushing on.
If refinancing is proving difficult
Sometimes the numbers simply do not work with the existing lender. That does not have to mean losing the property though. Options we regularly help clients through include negotiating an extension while a sale or re-letting is completed, refinancing part of a portfolio, bridging finance to cover a gap, or bringing in an investor. Because we also act for lenders when loans go wrong, including under our secured lending enforcement team, we know how a lender thinks at each stage and what will persuade it to keep working with a borrower.
The important thing is to start the conversation early. A borrower who approaches the lender six months before expiry with a plan is in a very different position from one who is still looking for a new lender the month the loan falls due.
How to prepare now
If your loan matures in the next twelve months, these steps will save time and money later.
- Find the original purchase file and check what was flagged at the time and whether it was ever resolved
- Make sure every tenant has a signed, completed lease and that any side agreements are written down
- Check the EPC rating and expiry date for every unit
- Confirm that any works carried out since purchase had the consents they needed
- Ask your existing lender for a redemption statement and check for early repayment charges\
- Speak to your broker and your solicitor at the same time, so the legal work starts while the lender is still deciding
Our guide to buying commercial property covers much of the same ground from the acquisition side, and our recent piece on the quarter day lease check is a useful starting point for the lease review.
Speak to our property finance team
Refinancing can seem like a straightforward transaction, but complications can arise if the paperwork is not in order. Borrowers who prepare their documents in advance are better placed to keep the process running smoothly when the lender begins making enquiries.
Our property finance team in Didsbury brings together our commercial property and corporate and commercial lawyers, and we act for borrowers and lenders across Manchester and the North West on everything from a single unit to a multi-property portfolio. If your loan is coming up for renewal, or you would simply like to know where you stand before you approach a lender, please get in touch and we will be happy to talk it through.