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What are the typical providers of real estate financing in your jurisdiction? Are there any restrictions on who may provide financing?
Typical providers include UK and foreign banks, real estate debt funds, insurers and pension funds. There are no restrictions on who may provide financing.
What are the most common structures used to secure real estate financing and how are these security interests perfected?
The security that a lender takes from a borrower will vary depending on the borrowing entity and the transaction structure. Typically, a borrower will grant to a lender a debenture incorporating fixed and floating charges over all of the borrower’s assets and undertakings.
The key elements of a security package include:
- a legal mortgage over the property;
- assignment of any key documents relating to the property, the rental income and the proceeds of any insurance claims relating to the property;
- a fixed charge over moneys held in the account into which rent is paid; and
- a floating charge over all of the borrower’s assets and undertakings.
If the borrower is a special purpose vehicle, the holding company will grant the lender a charge over the borrower’s entire issued share capital to facilitate selling the shares in the borrower rather than the asset itself.
What covenants are typically made in financing agreements?
The key covenants are:
- the provision of certain financial information and information regarding the occupational leases and tenants;
- financial covenants which typically monitor interest and cash-flow cover and leverage ratios;
- covenants to ensure that the borrower remains a bankruptcy-remote special purpose vehicle, including a negative pledge that prohibits the borrower from granting security over any of the secured assets, prohibitions on incurring financial indebtedness and prohibitions on the disposal by the borrower of its assets;
- property covenants dealing with:
- property use and maintenance;
- lease arrangements;
- compliance with environmental laws;
- prudent management of the property;
- property insurance;
- development of the property and applications for planning consent in respect of the same; and
- management of the property (including the collection of rental income) by a third-party managing agent.
Enforcement of security
How are security interests enforced in the event of default?
The enforcement options available will depend on the nature of the secured asset and the rights contained in the security documentation. Statutory and common law principles will govern the security holder’s ability to enforce security in the absence of information in the security document.
Notwithstanding the fact that an event of default has occurred, it may not be possible to enforce security if, for example, there is a standstill agreement or a moratorium is in place.
Provided that there are no restrictions, the first step is usually to make a demand for payment – this is usually a prerequisite for an event of default to arise.
Thereafter, the various methods of enforcing the security include:
- selling the asset;
- appointing a receiver;
- taking possession (a mortgagee rarely goes into possession); and
- foreclosing (a process rarely used as it is lengthy, expensive and inflexible).
What is the typical timeframe for the enforcement of security?
The timeframe will vary considerably depending on the type of property secured and the method of enforcement employed.
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