Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?
The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever. Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.
It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past. Three principle areas come to mind:
- Financial covenants associated with a loan
- Personal guarantees
- All Monies clauses
Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility. When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.
We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.
Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.
Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.
What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower. In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.
When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.
Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong. So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all. As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.
So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!
If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them