Senior Solicitor Steph Richards highlights the importance of Inter-Creditor Deeds in secured lending transactions, with a focus on development finance.
When might an Inter-Creditor Deed be required?
When a developer acquires a new property, or re-gears their financing to allow for development of an existing property, it is common for funding to be obtained by way of secured lending. Where there is more than one creditor there will likely be a contractual arrangement between the parties to establish the inter-play between the parties advancing funds to the borrower, so that the intentions are clearly defined prior to any difficulties being encountered.
What does an Inter-Creditor Deed do?
These agreements govern the priorities between the lenders and establish what actions can be taken by each lender. It is usual for the Deed to establish the priorities of the creditors, to dictate the manner in which repayments are to be made, as well as establishing the manner in which any enforcement under each of the legal charges can be taken, for example, the second lender may need the consent of the primary lender to begin proceedings against the borrower. Inter-Creditor Deeds can also be used to define what borrowing can be secured against a particular property, and whether the priority sum is limited or capped in relation to either lender.
Inter-Creditor Deeds, unlike more simplistic priority arrangements in a Deed of Priority, also include undertakings between the senior and junior creditors, requiring the subordinate lender to refrain from taking certain actions, and to prevent the borrower from making payments to the junior lender. The nature and extent of such undertakings will vary between lenders and may be a point of negotiation.
How do you know if an Inter-Creditor Deed is in place?
When a development loan facility has been made by a lender, it is common for the loan to be secured against the development site relating to the facility. A legal charge is used for this purpose and it can be registered against the Land Registry title of the property to record that the charge is in place. This also has the benefit of securing the lenders’ interest against that property as a secured charge, meaning that if the borrower falls on difficult times, then the lender has recourse against the property in prime position as a secured creditor. Where there are multiple charges, and where an Inter-Creditor Deed has been put in place in connection with a legal charge, notice of this Deed should also be registered against the title to the Property to perfect the priority arrangements. Any variation should also be made by deed and duly registered.