When a company or individual borrows money, the lender will need to take security for the funds they are lending to ensure they will be repaid.
For real estate finance matters, the security that the lender will take will depend on whether the borrower is a company or an individual, the borrower's financial strength and the loan's value.
The security is especially important if the borrower is a 'special purpose vehicle' (SPV) set up specifically for that transaction and is borrowing money for development, as they will have no financial history and its assets will usually be limited to that one property.
Lenders will nearly always want to take security over the property that the transaction relates to. This is often the borrower's most valuable asset.
The borrower will grant a legal charge (i.e. a mortgage) over the property in favour of the lender, which ultimately gives the lender the ability to sell the property if the borrower defaults on the loan or becomes insolvent.
The legal charge will not only charge the land to the lender but also any fixtures attached to the land, the borrower's rights to the benefit of any insurance policies and the borrower's right to collect rent in relation to the property.
The legal charge will be registered at the Land Registry, and most lenders require that a restriction is added to the property's title register stating that no disposition (e.g. transfer, lease, easement) can be registered without the lender's consent.
The legal charge must also be registered at Companies House if the borrower is a company.
In transactions where the borrower is a company, the lender is also likely to take a debenture over the company.
The debenture is all-encompassing and will cover all of the company's assets.
It will usually include both a fixed charge over specific assets and a floating charge over all other assets of the company.
The debenture must be registered at Companies House, and lenders will sometimes also require registration at the Land Registry in respect of any fixed charge over a property.
Where the borrower is a company, lenders sometimes require personal guarantees from individuals, most often one or more company directors. This is more likely when the company is an SPV.
The guarantee means that the lender can pursue the guarantor if the borrower doesn't repay the loan.
It is important that the guarantor understands the implications of providing a guarantee, as they can ultimately lose their home or be declared bankrupt.
Lenders normally require the guarantor to obtain independent legal advice on the guarantee and for the solicitor to provide a certificate stating that they have given the appropriate advice.
The lender may require other security documents depending on the type of transaction and the borrower.
For example, if the loan is to fund development, the lender may request a charge over the building contract.
For development funding, lenders also usually require collateral warranties from the building contractor and professional consultants involved in the construction.
The construction contracts will be between the borrower and the consultant, so the lender, as a third party, would not be able to rely on the undertakings in that contract.
However, a collateral warranty means that the lender can take action against the consultant in the event of a breach of the contract.