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Property Finance & Remortgage

Property finance can be divided into two very broad categories: development finance and commercial investment.

Development finance

This is finance provided by a lender with the purpose of buying and developing a site for either residential or commercial use. This type of finance is not usually available until a site has been granted planning permission for the relevant development.

From a market perspective, it is difficult to assess the impact of Covid-19 on the availability of development finance. Prior to the Covid-19 pandemic, however, the market had hardened, meaning that the availability of this type of development finance was fairly limited.

The general view at the moment is that the impact of Covid-19 will mean that growth is reduced and therefore there may not be the same demand for development finance. That said, in the residential sector the help-to-buy scheme has been a lifeline that has bolstered new home sales and - subject to interest rates remaining low - this looks likely to continue.

In terms of the legal aspects of development finance, under normal circumstances a lender will instruct its own solicitors and a borrower will instruct separate solicitors. From a lender’s point of view, the usual conveyancing principles and requirements will apply. The lender’s solicitor will want to see all the relevant searches that are relevant to the site concerned, including local, mining, drainage and environmental searches. The lender’s solicitor will also investigate the title to the property and will want to see the contract which the borrower is, or will be, entering into; in particular they will want to examine at the details of the planning permission. Of particular note to a lender will be any conditions attached to the planning permission; and the borrower will usually need to satisfy the lender that it can meet all the conditions set out in the planning permission.

The development finance is then usually drawn down in stage payments; the first stage being on the purchase of the site and then further stages based on an employer’s agent certifying that the relevant phase of construction has been completed and that the lender is safe to release a further stage payment.

Development finance is usually provided for a relatively short period of time: ie. sufficient time to enable the development to be completed, which means that a finance term will normally be for two to three years.

Commercial investment

Finance for this type of investment is typically used to purchase commercial investment properties or to refinance commercial investment portfolios.

One of the issues affecting the availability of commercial loans is the loan-to-value ratio which a lender is willing to accept. A higher loan-to-value ratio means a lender is taking on more risk; most commercial loans today are being limited to a 75% loan-to-value ratio and often much lower. This therefore affects the availability of funds for borrowers. A higher loan-to-value ratio usually means that the lender will charge the borrower a higher rate of interest on the loan, reflecting the great level of risk being taken by the lender.

Currently there are certain sectors which have been adversely affected by the Covid-19 pandemic, particularly the retail sector. There does appear to be plenty of finance available, however, for industrial property investments.

As with development finance, the lender will normally instruct separate solicitors to investigate the title and prepare a report on title for the lender. For commercial investments, a detailed focus will be placed on the strength of covenant of the tenants which occupy the properties. The lender and their solicitor will want to see all the occupational leases and they would normally expect to see a full repairing and insuring lease (FRI lease) in place. The usual FRI lease would have provisions that the landlord insures the property and recharges the cost of insurance to the tenant; the lease would also have a covenant by the tenant to keep the property in good repair. A lender’s solicitor would also give careful consideration to the rent review provisions in any lease along with the service charge provisions to make sure that all costs are recoverable from the tenant under the terms of the lease.

How LCF Law can support your property financing needs

Whether you are a lender, a property company or a business looking to leverage your property assets, our team at LCF Law has the knowledge and experience to support your property financing needs. We cover all the legal aspects of mezzanine finance, retail and industrial development investment, residential investment, property loans, the buying and selling of property portfolios and the full range of property security arrangements in order to protect and optimise your property investments and reduce your risk exposure. We have particular experience of all types of due diligence work, contractual structures and the assessment of security arrangements; and we have considerable experience in the healthcare, retail and leisure sectors.

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