Whether you are buying a commercial property, refinancing an existing investment or raising finance to support
your business, arranging commercial finance can be a complicated process.
There is usually more to it than simply finding a lender and signing the loan documents.
The lender will want to understand the transaction, the security being offered and the people or businesses
involved. There may be legal charges to put in place, guarantees to consider and conditions that need to be
satisfied before the money can be released.
For the borrower, the process can sometimes feel like there is a lot of paperwork without much explanation about what is actually happening.
So, what does a solicitor do when you are taking out commercial finance, and what should you expect from the process?
What Is Commercial Finance?
Commercial finance is a broad term covering a range of funding arrangements for businesses and investors.
It can include finance to:
– Purchase a commercial property
– Refinance an existing commercial mortgage
– Buy an investment property
– Fund a property development
– Release equity from an existing property
– Support a business acquisition
– Provide working capital
– Finance other business or investment activity
The legal work will depend on the type of finance being arranged and the security that the lender is taking.
A commercial mortgage secured against a property, for example, will involve different legal considerations from an unsecured business loan.
Why Does The Lender Need A Solicitor?
When a lender agrees to provide finance, it needs to make sure that its position is properly protected.
If the loan is secured against a property, the lender will usually want a legal charge registered against that property.
This gives the lender security for the money it is lending.
The solicitor’s role is to deal with the legal aspects of putting that security in place and to make sure that the lender’s requirements have been satisfied before the loan completes.
This can involve reviewing the title to the property, dealing with searches and enquiries and preparing or reviewing the relevant security documents.
The lender will usually have its own set of requirements, which the solicitor will need to work through.
What does the solicitor actually do?
This will depend on the transaction, but the legal work can include a number of different areas.
Checking the property
If the finance is secured against a property, the title will need to be reviewed.
The solicitor will check that the borrower has the right to grant the security and investigate matters that could affect the lender’s position.
This may involve looking at:
– The ownership of the property
– Existing mortgages or charges
– Restrictive covenants
– Rights affecting the property
– Leases
– Planning matters
– Other title issues
The lender needs to know that the security it is taking is legally sound.
Dealing with existing finance
It is common for commercial finance to involve refinancing an existing loan.
If there is already a mortgage or charge registered against the property, arrangements will usually need to be made to repay the existing lender and remove its security.
The new lender’s charge can then be put in place.
This is often referred to as a redemption and refinancing transaction.
It is important that the timing is managed carefully so that the existing finance is repaid and the new lender’s security is put in place as part of the transaction.
Personal guarantees
Depending on the borrower and the type of finance, a lender may ask directors or individuals to provide personal guarantees.
This can be an important part of the transaction.
A personal guarantee can mean that an individual becomes personally responsible for certain liabilities if the borrower fails to meet its obligations.
Anyone being asked to provide a guarantee should understand exactly what they are agreeing to before signing.
The implications can be significant, particularly where a business is borrowing a substantial amount.
What if the borrower is a limited company?
Many commercial property transactions are carried out through limited companies.
This can be particularly common where investors use a company to acquire and hold property.
Where a company is borrowing money, the lender may require security over the company’s assets and may also ask directors or shareholders to provide guarantees.
The solicitor will need to deal with the company’s legal requirements as well as the lender’s requirements.
There may also be additional documentation to put in place, depending on the structure of the transaction.
Why can commercial finance transactions take time?
One of the frustrations we sometimes hear from borrowers is that they thought the finance had already been agreed, so they do not understand why the legal process is taking so long.
The important distinction is between having a lender willing to provide finance and being in a position to complete.
Before funds can be released, the lender may require a number of conditions to be satisfied.
The solicitor may need to:
– Review the title
– Carry out searches
– Raise enquiries
– Deal with existing charges
– Prepare security documentation
– Obtain guarantees
– Satisfy lender conditions
– Register the new security
If an issue is identified, this can add time to the transaction.
For example, there may be an existing charge that needs to be dealt with, a restriction on the title or a problem with the property’s legal documentation.
Finding these issues early is always preferable to discovering them just before completion.
What about property development finance?
Development finance can involve additional layers of complexity.
The lender may want security over the development site and may also require additional guarantees or security.
The legal work can also involve development agreements, planning matters and monitoring requirements,
depending on the structure of the funding.
The timing of the finance can be particularly important for developers.
A delay in securing funding can affect the wider development programme, so it is sensible to involve your solicitor as early as possible.
Refinancing an existing property
Commercial refinancing can be a useful way for businesses and property investors to restructure their borrowing or release capital.
The legal process will depend on the existing and new finance arrangements.
For example, the transaction may involve:
– Repaying an existing lender
– Registering a new charge
– Changing the ownership structure
– Providing additional security
– Releasing equity
– Refinancing several properties
For investors with multiple properties, the structure can become more complicated.
The lender may want security over more than one property or may require the properties to be held in a particular way.
This is where having a solicitor who understands the wider transaction can make a difference.
What can go wrong?
Most commercial finance transactions are completed successfully, but problems can arise.
Some of the issues we see can include:
– Problems with the property’s title
– Existing charges that need to be removed
– Missing documents
– Restrictions affecting the property
– Issues with guarantees
– Delays in satisfying lender requirements
– Changes to the proposed finance
– Problems with the borrower’s corporate structure
The earlier these issues are identified, the more opportunity there is to resolve them.
This is one reason why it is generally better to involve your solicitor as early as possible rather than waiting until the lender is ready to release the funds.
Do you need your own solicitor?
The lender will normally have its own legal requirements, and in some transactions the lender may appoint its own solicitor.
However, it is important to understand whose interests the solicitor is representing.
A lender’s solicitor is there to protect the lender.
As the borrower, you may also need independent legal advice on matters affecting you, particularly where the transaction involves personal guarantees, complex security arrangements or other commitments.
Your solicitor should be clear about the scope of their role and who they are acting for.
What should you do before applying for commercial finance?
The legal process will generally be smoother if you have your information ready.
Depending on the transaction, this may include:
– Details of the borrower
– Company information
– Property details
– Existing mortgage information
– Title documents
– Details of any proposed guarantees
– Information about the intended use of the finance
Your lender and solicitor will let you know what is required.
The more quickly the relevant information can be provided, the less likely it is that the transaction will be delayed by missing documents.
The legal work is part of the finance process
Commercial finance can sometimes feel like the legal work is something that happens at the end of the transaction.
In reality, the legal process is an important part of getting the finance completed.
Whether you are buying a commercial property, refinancing an investment, raising finance for a development or restructuring existing borrowing, the legal position needs to be understood before the lender can safely release its funds.
Getting your solicitor involved early can help identify potential problems and give you a clearer idea of what needs to happen before completion.
How Insight Law can help
At Insight Law, our commercial property team advises businesses, investors and property owners on commercial finance transactions.
We understand that finance is often time-sensitive and that delays can have a knock-on effect on a wider transaction.
Our team can assist with the legal aspects of commercial lending, including property finance, refinancing and transactions involving secured lending.
If you are arranging commercial finance, we can help you understand the legal process and work with you and your lender to progress the transaction towards completion.
The earlier we are involved, the sooner we can identify any legal issues that may need to be addressed.
This article is intended as a general guide and does not constitute legal or financial advice. The legal requirements will depend on the nature of the finance, the security being offered and the circumstances of the transaction.