There is currently a perception that bankers are at least partially responsible for the global credit crisis of 2009. It is perhaps, therefore, ironic that it is with bankers that businesses and investors have to negotiate when the problems following on from the credit shortfall affect cash flow. Mary Monson Commercial Law Solicitors have acted in many cases where all or part of a property portfolio has been refinanced, and we have undertaken the legal responsibilities in respect of the re-mortgage. We have highlighted some of the common issues that face investors and lenders below.
The Stance that Banks are Taking
If a bank is focused on keeping good clients satisfied for long term benefits, then they should be prepared to consider different mortgage debt packages, for example by offering low interest rates, to allow a customer to trade out of difficulty, in much the same way as a landlord might offer a rent free period for the same purpose during a recession. In the same way that a landlord will have the benefit of a long term tenant when times are easier, a bank will be able to rely on a good long term client in the same way.
This may affect, for example, people who have businesses, who have charged their properties to their bank on a fixed interest basis, who now find with falling interest rates that they are overpaying. In the context of that relationship, the bank should be able to afford to be flexible and repackage, rather than cling to an artificially onerous but ultimately unsustainable deal.
A problem can be that the bank manager in a local bank has very little discretion, and where the decision is deferred to divisional level, very little particular knowledge of the customer and the real issues affecting the proposed transaction is actually taken into account. Of course, banks have different levels of discretion at different levels. One might expect a state owned bank to take a different position from non state held variants.
The first stage is to actually speak at length with the bank involved. It goes without saying that simply speaking to a “relationship manager” may not be enough. The ideal bank is one who actually understands that a viable but less profitable deal is often better than a more profitable deal which is either unviable for the customer or makes the customer seek alternative banking. The general rule must be to speak to one’s existing lender as a first port of call.
Sale and Leaseback
Any borrower with charge of one or more properties will continually keep an eye on the market in order to, if they can, reduce their exposure to lenders. In addition, many property owners often seek more cash and may be prepared to enter into schemes which will convert property – e.g. sale and leaseback.
Sale and leaseback transfer the property asset to a specialist company, usually a big institution, and that institution will then grant a lease of the new property to the borrower. The former owner then pays rent to the institution as a tenant but then can offset that expenditure against tax. This can be particularly relevant where a company has developed or invested in a specific type of large property for its own purposes, but does not wish to be saddled with a situation in which the use of such a property requires capital to be tied up.
It is usually a long lease granted to the former owner, who will want the lease to be on sympathetic terms. Of course, the buyer wants a marketable lease, and therefore a conflict requiring negotiation may arise which must be ironed out relatively early.
This type of transaction is not only relevant to large companies, but could also be relevant to, for example, a medium sized distribution or manufacturing company. In the current climate, where cash in the banking system is relatively hard to come by, this option can be especially attractive to a trader with a healthy position, but a cash hungry business.
In situations in which large portfolios of property investors are at risk in the current financial climate, refinancing may be an attractive and necessary option.
If there is going to be any restructuring of property debt, a lender will often have very specific requirements which have to be accepted by the borrower. These are likely to include charges on the property or properties, and debentures on the assets of the company.
The Role of a Lawyer
While a commercial solicitor should be able to advise in principle informally about the above, it is really in respect of any new mortgage or sale transaction that a solicitor’s role becomes more important. A client should expect that their commercial property lawyer will properly execute the documentation, register the transaction with the land registry, and deal with any redemption of the earlier mortgage with the lender. It is by being proactive and efficient in these communications that a lawyer can really assist, because delay can have detrimental effects on the cash flow of the client, and could ultimately hinder or even prevent a refinance deal from taking place.