Advice on re-mortgaging commercial property

01/11/2009

By the Commercial Property & Development team. Featured in Kent Business and Kent Messenger.

There are many reasons why a business may re-mortgage. If trading conditions are difficult it can be a way to reschedule debt repayments and improve cash flow. It can also be a way to raise additional working capital. Whatever the reasons, it is important that a business understands the process.

This will be slightly different depending on whether the property is freehold or leasehold. There are additional considerations if there is a prior charge over the property to another lender.

Freehold property

A lawyer will first need to order searches of the property and to investigate title to the property. The report to the lender will give the lender a clear picture of anything that may affect the value of the property or cause the lender difficulties if it has to step in and sell the property.

This process will usually include a survey or valuation. In a falling market, a lender is usually more cautious about the ratio of borrowing secured on the property compared to the property's value.

Leasehold property

The process for remortgaging on leasehold property is very similar. However, there are some additional points to consider. The investigation of title is often more complicated in leasehold property because the solicitor will have to review the terms of the lease and any other relevant leases. Quite often, there will be other documents such as licences to consider.

Very often leases contain provisions which allow a landlord to forfeit (end) the lease if the tenant (i.e. the borrower) becomes insolvent. This means the landlord can potentially 'end' the lease over which the lender has a charge. Dealing with this issue can cause extra time and expense.

The consent of the landlord to the charge is usually required and this may involve additional costs. Once the charge is completed, notice will need to be given to the landlord and usually, a fee paid.

Legal charge

The charge will contain many standard clauses. These usually include obligations to keep the property in repair and to insure it, as well as repaying the cost of the loan plus interest. 

The borrower will usually have to agree to restrictions on it selling or dealing in any way with the property without the prior consent of the lender.

Sometimes the charge will contain warranties by the borrower. These are statements the borrower makes which confirm that certain conditions exist, for example, that there is no breach of any planning consents.

Completion of the charge

Once the charge is completed and the loan advanced, the solicitor will arrange for it to be registered at both Companies House (if the borrower is a Limited company) and the Land Registry. There is no stamp duty land tax payable on a charge.

Costs

You will be expected to cover all the costs involved. This includes the cost of the solicitor acting for both you and the bank (provided there is no conflict of interest). Occasionally, the bank will appoint a separate solicitor. In addition, you will need to pay the cost of any of the searches that the lawyers has to undertake and the cost of any survey or valuation, as well as the registration costs at the Land Registry and Companies House.

Second legal charge

The consent of the first charge holder to the second lender's charge will need to be obtained and the charge holder will need to be given notice once the charge is completed and registered at the Land Registry. Sometimes a document governing the relationship between the two lenders is required.

Summary

Whilst remortgaging may seem a complicated process, do not be put off because it is an effective way of improving cash flow or raising additional finance. The most important point is to clarify with the lender the investigations it requires and any conditions attached to the loan. This will help the lawyer to clearly cost the legal side of the transaction. If the lawyer's investigations reveal that there are difficulties with the property, then all parties need to be clear that they wish to continue and incur any further costs needed to resolve those difficulties.