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What happens when property finance goes wrong (before and after lending)? Monday 14 September 2009 Jonathan Lawrence, Partner, K&L Gates LLP.

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Presentation on theme: "What happens when property finance goes wrong (before and after lending)? Monday 14 September 2009 Jonathan Lawrence, Partner, K&L Gates LLP."— Presentation transcript:

1 What happens when property finance goes wrong (before and after lending)? Monday 14 September 2009 Jonathan Lawrence, Partner, K&L Gates LLP

2 4 What are the deal breakers before lending?  Valuation amount  Lack of equity / mezzanine debt  Loss of tenant  Bank loses appetite generally or specifically  Due diligence on B or sponsor  Site / planning / environmental / title problems  Credit committee process  Strength of parent company guarantee  Anti-money laundering checks

3 5 What happens when a loan can’t be serviced?  Amendment and waiver (especially of interest rate, covenants and payment schedules)  Offering cash deposits, more security and guarantees  Finding new tenants / upgrading the property  Handing back the keys  Court proceedings  Insolvency / receivership

4 6 Security  Legal mortgage  Fixed charge  Assignment of rental income  Floating charge  Guarantees  Negative pledge

5 7 Legal mortgage  Over specified real estate  Transfer of legal ownership from mortgagor (B) to mortgagee (L)  Mortgagor has right to return of property and payment of any balance after satisfaction of mortgage (right of redemption)

6 8 Fixed charge  All other freehold and leasehold property  All buildings, fixture, plant and machinery on the property  All future interests in land  Benefit of all agreements relating to land  Right and interest in proceeds of sale of charged property  Amount standing to credit of all bank accounts  Book debts and other receivables  Goodwill and uncalled capital  Right to recover VAT on any supplies relating to charged property

7 9 Assignment by way of security  Rental income  Right to payment under all present and future insurance policies over any charged property  Rights against any tenants of property  Benefit of any hedging documentation  Rights under any development and acquisition documentation  Benefit of all contracts relating to property

8 10 Other security  Floating charge  Over all other assets of B not covered by the other security  Crystallisation  Share charge over shares in B  L has opportunity to take control of B  Choice to sell B rather than the property  Negative pledge

9 11 Practicalities  Security documentation must be correctly registered (“perfected”)  English company: Companies House  Non-English company: all companies - Slavenburg register (pre 1 October 2009) / only if registered place of business in UK (1 October 2009 and thereafter)  Land Registry  Otherwise void against liquidator, administrator, creditor of the company  Governing law – location of assets?

10 12 Guarantees  Especially relevant when dealing with SPV B with no trading history where real estate is sole asset  L should ensure the guarantor enters guarantee as a primary obligor and therefore has to immediately comply with any demand made on the guarantee without L having to first make demand of B  Guarantor likely to seek grace period

11 13 Why is the security package so important?  Security Trustee has certain control over all assets of B  Ideally only security over property itself is needed to recover the principal amount of the loan  Remaining security satisfies L’s underwriting in case the LTV covenant is breached

12 14 Pre-insolvency: Protection for the Lender  Most importantly through security  Fixed charge  Floating charge  Security Trustee  Effect? Enforcement and realisation  100% flawless?  No…

13 15 Deficiencies with taking security  Floating charges and the “prescribed part”  Statutory order of priority of proceeds  Moratorium (with certain insolvency proceedings)  Deficiencies in realisation

14 16 Who can challenge a bank’s security?  The borrower  The guarantor or other security provider  The liquidator or administrator  The shareholders (where directors exceed their powers)

15 17 What challenges to security are available?  Lack of commercial benefit  Preference  Transaction at an undervalue  Avoidance of floating charges  Unfair contract terms  Undue influence  Variations to secured sums

16 18 Enforcement  B unable to repay loan  B has breached its covenants  Enforcing security and insolvency procedures

17 19 What is insolvency?  When a corporate entity “is unable to pay its debts” (Section 123 Insolvency Act 1986)  Tests  Failure to pay a statutory demand  Execution on a judgement is unsatisfied  Unable to pay its debts as they fall due (“cash flow” test)  Value of assets less than liabilities (“balance sheet” test)  Threshold amount: £750

18 20 Relevance to Lenders?  Likelihood of repayment of loans if B insolvent?  Loan agreement contains safeguards: chiefly through events of default and acceleration  How does acceleration help L?

19 21 Insolvency Procedures  Administrative receivership and fixed asset receivers (e.g. LPA receiver)  Liquidation  Administration  Compromise arrangements

20 22 Background to the Enterprise Act 2002  Came into force on 15 September 2003  Promotion of “rescue culture”  Abolition of Crown preference  Creation of the prescribed part

21 23 Receiverships, Administrations and Company Voluntary Arrangements in England and Wales registered at Companies House (figures from the Insolvency Service website) YearReceivership Administrator In Administration Company Appointments Appointments (Enterprise ActVoluntary 2002)Arrangements 1997 1,837 196:629 1998 1,713 338:470 1999 1,618 440:475 2000 1,595 438:557 2001 1,914 698:597 2002 1,541 643:651 2003 1,261 497 247726 2004 864 11,601597 2005 590 42,257604 2006 588 03,560534 2007 477 22,327399

22 24 Insolvency Procedures: Receivership  The appointment of a person to administer (i.e. sell) specific property charged to a creditor  Administrative Receivership, now relatively rare – Enterprise Act 2002 limits this to security created before 15 September 2003 and certain other exceptions  Realise certain assets of B charged to appointor to repay indebtedness to appointor  No moratorium  Appointment by a qualifying floating charge holder with a floating charge over all, or substantially all, of the assets of the debtor company  Administrative receiver owes duties solely to appointor  Blocks appointment of administrator  LPA Receivership and Fixed Charge Receivership

23 25 Insolvency Procedures: LPA Receivership  L with fixed charge over property can enforce by appointing an LPA receiver  LPA receiver will act as B’s agent to sell the charged property/collect rental income for L’s account  Advantages:  Alternative to L taking possession of property  LPA receiver often an experienced property professional  Quicker and cheaper for L

24 26 Insolvency Procedures: Administration  Active businesses, significant assets, potential  Statutory “purposes” brought in by Enterprise Act 2002  Rescue company as a going concern  Achieve a better result than in liquidation  Realise property for secured (or preferential) creditor  Moratorium  Appointment is by notice (company, directors or QFC, who has overriding powers) or by application to court (company, directors, all creditors)  First ranking QFC can appoint its own choice of administrator  Administrator owes duties to all creditors

25 27 Insolvency Procedures: Liquidation  Terminal procedure  Appointment? Shareholder resolution (voluntary liquidation) or court order (compulsory liquidation)  Realisation, distribution, dissolution  Order of priorities  Delay in enforcement

26 28 Administrative Receivership  May be appointed by:  Holder of floating charge (created before 15 September 2003) over whole/substantially the whole of assets  Holder of floating charge (created after 15 September 2003) over whole/substantially the whole of assets where a statutory exception applies  Floating charge crystallises  Control and management passes to administrative receiver (“AR”)

27 29 Administrative Receivership  No moratorium triggered  AR’s principal duty – realise property in order to repay debt owing to appointer  Often results in quick sale at price sufficient to discharge secured creditor only  Company then usually placed in liquidation

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