Bridging Loans and Development Funding

Lender’s provide a “bridge”, a cash facility for a finite period of time, normally 6-12 months. There may be an occasion when a property comes on the market or a business proposition becomes available and short term funding is needed quickly.

This type of finance is typically used to facilitate the refurbishment or development of property. The intention is usually is to re-finance or sell the development within the time limits. This could be by the obtainment of a buy-to-let mortgage or from an outright sale that will ensure the repayment of the loan.

Loan interest is comparatively high for such short term lending, but is also normally calculated in it’s entirety and is rolled over or retained i.e. added to the total amount that will need to be repaid at the end of the loan.

The mortgage lender requires that a JBSP form (or similar) is completed and independent legal advice is provided to ensure that the person or persons not on the title deeds but on the mortgage understand the legal implications. This is sometimes referred to as Non Owner Borrower Independent Legal Advice or Supporting Borrower Independent Legal Advice. Consideration also needs to be given in terms of affordability, levels of income or other financial means that are adequate enough to cover the mortgage costs.

For Bridging Loans lenders require personal guarantees from the company directors for security. Financial agreements and guarantee documentation can be detailed and comprehensive. It is important that the developer has had experience in this field and is confident of meeting the targets.

Any delays in the project will risk not meeting the lender’s criteria and be in breach of the loan agreement. It is essential that all costing and timescales are realistically and accurately calculated with a clear exit strategy to reduce the exposure to risk.

We offer Independent Legal Advice for Director’s Guarantees for Bridging Loans. This is to fully understand the exposure to risk and personal liability in the signing and certification of the guarantee agreements. Independent Legal Advice for Bridging Loans is needed as assets such as property will be used as security against the loan advance. The financial implications and their associated risks need to be fully explained to the borrower by a solicitor.

Deed of Subordination

A Deed of Subordination is a requirement of a lender if the company concerned has borrowed funds from multiple sources. This gives the lender priority over other creditors in terms of the order of repayment.

This effectively subordinates (places other creditors in a lower class) and assigns any new funding to first position in terms of ranking. This is for the purpose of collecting outstanding debt should the company fall into financial difficulty, bankruptcy or foreclosure.

We offer Independent Legal Advice for Deeds of Subordination to ensure that all the financial and legal implications with regards to risk are fully appreciated.

In the case where directors have loaned money to the company (director’s loan account), the deed of subordination may ensure that monies cannot be withdrawn from the company to satisfy their debt, until the lender’s loan has been repaid.

Company Debenture

A lender may require a Company Debenture as a form of security for the loan. This effectively is a fixed or floating charge over the assets of the company. This includes current assets such as cash at bank and the company debtors, as well as fixed assets such as property, machinery and equipment.

A Company Debenture allows the lender to claim a specific interest or right over the company’s assets in case of non-payment or default. It enhances security for lenders by creating a legal claim on the company’s assets.

If a company faces insolvency or liquidation, Debenture holders will have a higher claim on the company assets compared to the shareholders.

We offer Independent Legal Advice for Company Debentures to ensure that all the legal implications and the financial risks are completely understood.

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