Lending money privately can be a very lucrative investment, however the recent Court of Appeal case of Investec v Booth 2016 and its coverage in the media, has no doubt reminded lenders of the potential risks involved. It may therefore be of interest for lenders to note that, in order to reduce risk, there are initial steps and precautions that Alexandra Bassford thinks that lenders should personally take before deciding whether to lend.
1) Valuations
It is vital that any valuations are up to date. Lawyers are not qualified to value a property. Lawyers can review the valuations and make comments but it is up to the lender to satisfy themselves that they are happy with the value given. If the valuation suggests that a specialist report be carried out, then such report should be carried out before proceeding further with the lending. It may also be prudent to request two or even three valuations to gain an average value of the property as valuations have varied quite considerably in recent times.
2) Loan to Value
This ties in with the requirement for accurate valuations. You must bear in mind the fluctuating market and any prior charges and the interest payable thereon in order to establish LTV.
3) Position of the Charge
Whilst second and third charges may seem less appealing, depending on the circumstances, they may be a far safer option than a very high LTV first charge. If securing after a first charge, you must also consider whether the prior secured bank has granted their authority for the new charge to be registered. If the new charge puts the borrower in breach of their prior facility agreement, then the loan may be called in, which ultimately may bankrupt the borrower, something no lender wants to deal with.
4) Guarantors
If lending to a company then an individual should almost always act as a guarantor (in most cases a director). A guarantor provides additional security as, in most cases, if a company goes into administration, the directors will not become personally liable for any outstanding debt. The guarantee also acts as an additional incentive for the guarantor to ensure the company discharges all of its obligations in relation to the lending.
5) Bankruptcy
Carrying out credit checks will give an indication of the persons borrowing history and may assist you in evaluating the risk.
6) The Type of Security
If the property is tenanted, and the repayment is based on the rental, then it may be worth considering whether to take security over the rental stream. Another matter to take into consideration is the implications if the tenant defaults on the rent. There is the also the additional consideration of how tenants may treat the property.
If a spouse or common law spouse or civil partner resides in the property that represents the matrimonial home and the spouse or civil partner is not a joint debtor, then under Article 12 of the Bankruptcy (Desastre) Jersey Law 1990, that spouse or civil partner has the right, within three months, to apply to the court for an order in respect of the property. This not only creates a three month delay in dealing with the property but also may affect the security itself depending on the court order. The law states that the court’s duty is first to give consideration to the desirability of reserving the matrimonial home for the spouse or civil partner and/or their dependants. Historically spouses have been granted life enjoyment for a specified period or ownership of the property subject to a hypothec in favour of the creditor in the event of sale, death or cession of the property. Whilst it is usual practice to have the spouse or civil partner to sign a waiver, the law still allows for an application to be made.
Although lawyers ask the borrower’s lawyer to confirm whether there are any tenants and/or potential Article 12 claims, the borrower’s lawyer can only provide such information having made due enquiry of their client. If their client has not been forthcoming with the information then the truth of the situation usually only comes to light when it is too late and bankruptcy proceeding have be initiated. Lenders may be more familiar with the borrowers and/or the property and therefore may be better placed to obtain this information which will assist in making an informed decision whether to lend and on what terms.
