How can lenders enforce security over land?

Guy Evans recently wrote a piece for Development Finance Today.

Large developments are complicated projects and problems on site can quickly compound, increasing costs and causing delays. In a strong market, lenders may be willing to extend loan terms to cover these delays, but in economic uncertainty, lenders may be less willing (or able) to do so. So what are the options, if a lender needs to enforce its security?

What does a standard security package look like in development finance?

What security a lender has will vary depending on the client and the development. A ‘standard’ package might include:
1.    A first charge over the development
2.    A debenture over the assets of the development company
3.    A charge over the shares of the development company
4.    Personal guarantees from the directors of the development company.

That package gives the lender flexibility over how it chooses to recover money.

The biggest decision for the lender is whether they need to take control of the development company itself or whether it will be sufficient to just get control of the property.

What happens if the lender needs to get control over the development company?

If the lender needs to get control of the development company, it has two main options – enforcing its charge over shares or appointing an administrator under its debenture.

By enforcing its charge over shares, the lender can get control of the development company itself.

Most debentures will be a ‘qualifying floating charge’. If so, the lender can use the debenture to appoint administrators over the company. Unlike most administrations, lenders can appoint administrators under qualifying floating charges without going to court. In practice, these ‘out-of-court’ appointments are more common than enforcing shares as they give lenders a fast, cost-effective way of getting control of the company.

What happens if a lender needs to take possession of development property

If the development is at an advanced stage and the lender simply needs to push through a sale, they might exercise their rights as mortgagee to take possession of the property, appoint receivers, or exercise a power of sale.

Where there is a default, the lender is likely to be entitled to take possession of the property immediately as mortgagee in possession. As mortgagee in possession, the lender owes duties to the borrower, which may make this less attractive than some other enforcement options.

The other key option for a lender is to exercise their power of sale under the charge. This will only be appropriate where the lender doesn’t need to actively manage the property in the run up to the sale (otherwise they are likely to end up a mortgagee in possession). The lender has to take reasonable care to obtain a ‘proper price’.

It is more common for lenders to appoint receivers over property. The receivers usually act as the agent of the borrower. The charge will usually give the receivers very broad powers to manage the property. Liabilities incurred by the receivers will be the liabilities of the borrower. That gives the lender a protection as they are a step removed from the actions of the receivers.

What role do the guarantors in development finance play when it comes to enforcing security?

In parallel with enforcing its security over the development company and the property itself, lenders may also wish to enforce any personal guarantees given by directors of the development company. Personal guarantees are often capped and are rarely secured against guarantors’ assets, making them a less attractive primary enforcement option.

Conclusions

Enforcement is a complex area and can carry risks for the lender. While there has been an uptick in lenders needing to enforce, it is still very much a last resort. If at all possible, it will be preferable for the borrower and lender to work together to bring the development to a successful conclusion.