Purchasing a commercial property is a significant investment, and it is important to understand the requirements for a purchase with funding compared to a cash purchase.
The key difference between a cash purchase and a purchase with funding is the involvement of a lender.
As the lender will be providing funds for the purchase, they will require specific conditions to be met before they release the funds.
These additional requirements mean that the legal process can be longer and more complex, often increasing costs and adding to the required documentation.
Our Banking lawyers explain what buyers need to know when purchasing a commercial property with funding, including the lender’s requirements, due diligence, security, and the key steps to consider ahead of completion.
How Does Having a Lender Change the Legal Process?
For a cash purchase, the buyer can focus solely on their own requirements; however, when funding is being used, this means the lender also becomes a stakeholder and will have additional requirements that need to be met.
The lender will need to confirm that the property is suitable security for the loan being made.
The lender can choose to instruct their own solicitor, but it is common for the purchaser’s solicitor to also act for the lender as well as the purchaser, especially on lower-value purchases.
In cases where the lender has a separate solicitor, this adds an additional party to correspond with, which will make the process lengthier.
Due Diligence and Valuation
Due diligence is normally conducted on every commercial property purchase whether the buyer is purchasing with cash only or with funding.
The buyer’s solicitor will investigate the property and flag any potential issues that could affect the use, ownership or value of the property.
This includes reviewing the legal title, obtaining searches, reviewing replies to enquiries, considering the planning position and making the buyer aware of any rights or restrictions affecting the property.
With a cash purchase, if any concerning issues arise, the purchaser has the freedom to decide whether they are willing to accept the risk.
However, when a lender is involved, they will have their own requirements to consider as the property is being used as security for their loan.
This means that any problems concerning the value or marketability of the property may then affect the lender’s ability to enforce the security.
Lenders are very risk-averse and will usually require the purchaser to resolve the problem before they will release the funds. This could be by obtaining indemnity insurance or rectifying the issue in another way, which can increase costs and timescales for the transaction.
Another requirement of a lender is to conduct a valuation of the property to assess the value and suitability of the property as security for the loan. If the valuation raises concerns, it could affect the viability and terms of the available finance.
As the valuation is often for the benefit of the lender only, the buyer does not have control of the time it takes or the outcome.
The Lender’s Security
The lender will require security for the money it is lending to the buyer.
This is usually in the form of a legal charge over the property.
The charge gives the lender rights over the buyer’s property, which protects the lender in case the buyer fails to repay the loan.
Upon completion, the charge will need to be registered on the property's title register. If the borrower is a UK company, the charge will also need to be filed at Companies House.
Sometimes the lender will require additional security in addition to the legal charge.
The additional security will depend on the particular finance arrangement, but if the borrower is a company, it often includes a debenture over the assets of the borrower and a personal guarantee from a director, under which they agree to become personally liable if the borrower fails to meet its obligations.
These are additional steps required when purchasing with funding, as the documents will need to be reviewed and signed.
It will also be a requirement of the lender that any personal guarantors obtain independent legal advice on the personal guarantees.
Practical Tips
If you are planning on using funding for a commercial property purchase there are some tips we recommend following to make the process smoother:
- Make sure to start the funding process early. Don’t wait until the transaction is underway, as you will need to allow time for the valuation, lender approval, and any specific conditions they have, which may delay the transaction.
- Be clear with your solicitor from the outset. Let them know that funding will be involved so they can consider the lender’s requirements and additional documentation that may be necessary.
- Make sure you understand the lender’s requirements and are aware of the conditions that must be met before funds are released. By understanding what you are agreeing to this prevents discovering outstanding requirements close to completion.
- Be realistic about timescales and make sure to factor the lender into proposed completion dates and allow time for the drawdown notice period.
- Make sure to factor in the additional costs of funding as it is not as straightforward as a cash purchase. Consider valuation fees, broker fees, the lender’s legal fees and any extra costs that may be relevant to the funding aspect of the transaction.
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"Funding can be a useful way to purchase commercial property without committing to the full purchase price from your own capital. It is important that, if you choose the funding route, you understand the lender's additional requirements and the increased costs and timescales this entails. Make sure that you are aware of the additional due diligence requirements, the importance of the security documents, and that you have budgeted for the lender’s costs. Early planning between the purchaser, lender, and solicitors will make sure the transaction can progress efficiently and reduce the risk of any delays." |
Discuss Your Property Purchase
If you are considering using funding for a commercial property transaction and require legal assistance, our Commercial Property Lawyers have extensive experience in this area, please get in touch with us.
0161 941 4000
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Charlotte Hook
Senior Associate
Charlotte is a senior associate in the Real Estate team at Myerson. She trained at Myerson and qualified in September 2017. Charlotte has been recognised in the Legal 500 several times as a “Rising Star” and a “Leading Associate”.
Charlotte specialises in sales and purchases, landlord and tenant work and secured lending matters. She has acted for both sellers and purchasers on various types of properties including offices, retail units, industrial units and land for development. Charlotte has expertise in negotiating conditional contracts, option agreements and overage provisions.
About Charlotte Hook