What happens when property finance goes wrong (before and after lending)? Monday 14 September 2009...
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Transcript of What happens when property finance goes wrong (before and after lending)? Monday 14 September 2009...
What happens when property finance goes wrong (before and after lending)?
Monday 14 September 2009 Jonathan Lawrence, Partner, K&L Gates LLP
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What are the deal breakers before lending? Valuation amount Lack of equity / mezzanine debt Loss of tenant Bank loses appetite generally or specifically
Due diligence on B or sponsor Site / planning / environmental / title problems
Credit committee process Strength of parent company guarantee Anti-money laundering checks
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What happens when a loan can’t be serviced? Amendment and waiver (especially of interest rate, covenants and payment schedules)
Offering cash deposits, more security and guarantees
Finding new tenants / upgrading the property
Handing back the keys Court proceedings Insolvency / receivership
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Security
Legal mortgage Fixed charge Assignment of rental income Floating charge Guarantees Negative pledge
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Legal mortgage
Over specified real estate Transfer of legal ownership from mortgagor (B) to mortgagee (L)
Mortgagor has right to return of property and payment of any balance after satisfaction of mortgage (right of redemption)
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Fixed charge
All other freehold and leasehold property All buildings, fixture, plant and machinery on the property
All future interests in land Benefit of all agreements relating to land Right and interest in proceeds of sale of charged property
Amount standing to credit of all bank accounts Book debts and other receivables Goodwill and uncalled capital Right to recover VAT on any supplies relating to charged property
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Assignment by way of security
Rental income Right to payment under all present and future insurance policies over any charged property
Rights against any tenants of property Benefit of any hedging documentation Rights under any development and acquisition documentation
Benefit of all contracts relating to property
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Other security
Floating charge Over all other assets of B not covered by the other security
Crystallisation Share charge over shares in B
L has opportunity to take control of B Choice to sell B rather than the property
Negative pledge
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Practicalities
Security documentation must be correctly registered (“perfected”) English company: Companies House Non-English company: all companies - Slavenburg register (pre 1 October 2009) / only if registered place of business in UK (1 October 2009 and thereafter)
Land Registry Otherwise void against liquidator, administrator, creditor of the company
Governing law – location of assets?
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Guarantees
Especially relevant when dealing with SPV B with no trading history where real estate is sole asset
L should ensure the guarantor enters guarantee as a primary obligor and therefore has to immediately comply with any demand made on the guarantee without L having to first make demand of B
Guarantor likely to seek grace period
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Why is the security package so important? Security Trustee has certain control over all assets of B
Ideally only security over property itself is needed to recover the principal amount of the loan
Remaining security satisfies L’s underwriting in case the LTV covenant is breached
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Pre-insolvency: Protection for the Lender Most importantly through security
Fixed charge Floating charge
Security Trustee Effect? Enforcement and realisation 100% flawless?
No…
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Deficiencies with taking security
Floating charges and the “prescribed part”
Statutory order of priority of proceeds
Moratorium (with certain insolvency proceedings)
Deficiencies in realisation
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Who can challenge a bank’s security?
The borrower The guarantor or other security provider
The liquidator or administrator The shareholders (where directors exceed their powers)
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What challenges to security are available? Lack of commercial benefit Preference Transaction at an undervalue Avoidance of floating charges Unfair contract terms Undue influence Variations to secured sums
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Enforcement
B unable to repay loan B has breached its covenants Enforcing security and insolvency procedures
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What is insolvency?
When a corporate entity “is unable to pay its debts” (Section 123 Insolvency Act 1986)
Tests Failure to pay a statutory demand Execution on a judgement is unsatisfied Unable to pay its debts as they fall due (“cash flow” test)
Value of assets less than liabilities (“balance sheet” test)
Threshold amount: £750
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Relevance to Lenders?
Likelihood of repayment of loans if B insolvent?
Loan agreement contains safeguards: chiefly through events of default and acceleration
How does acceleration help L?
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Insolvency Procedures
Administrative receivership and fixed asset receivers (e.g. LPA receiver)
Liquidation Administration Compromise arrangements
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Background to the Enterprise Act 2002
Came into force on 15 September 2003 Promotion of “rescue culture” Abolition of Crown preference Creation of the prescribed part
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Receiverships, Administrations and Company Voluntary Arrangements in England and Wales registered at Companies House (figures from the Insolvency Service website)
Year Receivership Administrator In Administration Company
Appointments Appointments (Enterprise ActVoluntary
2002) Arrangements
1997 1,837 196 : 6291998 1,713 338 : 4701999 1,618 440 : 4752000 1,595 438 : 5572001 1,914 698 : 5972002 1,541 643 : 6512003 1,261 497 247 7262004 864 1 1,601 5972005 590 4 2,257 6042006 588 0 3,560 5342007 477 2 2,327 399
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Insolvency Procedures: Receivership The appointment of a person to administer (i.e.
sell) specific property charged to a creditor Administrative Receivership, now relatively rare –
Enterprise Act 2002 limits this to security created before 15 September 2003 and certain other exceptions
Realise certain assets of B charged to appointor to repay indebtedness to appointor
No moratorium Appointment by a qualifying floating charge holder
with a floating charge over all, or substantially all, of the assets of the debtor company
Administrative receiver owes duties solely to appointor
Blocks appointment of administrator LPA Receivership and Fixed Charge Receivership
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Insolvency Procedures: LPA Receivership L with fixed charge over property can enforce by appointing an LPA receiver
LPA receiver will act as B’s agent to sell the charged property/collect rental income for L’s account
Advantages: Alternative to L taking possession of property
LPA receiver often an experienced property professional
Quicker and cheaper for L
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Insolvency Procedures: Administration
Active businesses, significant assets, potential Statutory “purposes” brought in by Enterprise Act
2002 Rescue company as a going concern Achieve a better result than in liquidation Realise property for secured (or preferential) creditor
Moratorium Appointment is by notice (company, directors or QFC,
who has overriding powers) or by application to court (company, directors, all creditors)
First ranking QFC can appoint its own choice of administrator
Administrator owes duties to all creditors
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Insolvency Procedures: Liquidation
Terminal procedure Appointment? Shareholder resolution (voluntary liquidation) or court order (compulsory liquidation)
Realisation, distribution, dissolution Order of priorities Delay in enforcement
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Administrative Receivership
May be appointed by: Holder of floating charge (created before 15 September 2003) over whole/substantially the whole of assets
Holder of floating charge (created after 15 September 2003) over whole/substantially the whole of assets where a statutory exception applies
Floating charge crystallises Control and management passes to administrative receiver (“AR”)