Covid-19 is creating new challenges to virtually every aspect of our lives. We consider the impact it is having on charging transactions and mitigation strategies.
The impact of social distancing measures imposed in the UK as a result of Covid-19 has resulted in a significant proportion of the work force being unable to attend the office or potentially unable to work altogether at any given time. We consider the implications of these restrictions in relation to charging transactions and some potential solutions.
Valuations
Social distancing restrictions mean that valuers are currently unable to carry out inspections, external or otherwise as these are not deemed to be 'essential'. Valuations are of course an intrinsic element to the property charging process and if transactions are still to proceed there will need to be flexibility on the part of both funders and valuers to overcome this hurdle. Following guidance issued by RICS on 2 April to its members regarding the use of and proposed wording for abnormal uncertainty clauses - the inclusion of these in valuations seems to becoming increasingly accepted practice. Valuers are also proposing greater reliance on desktop valuations produced using photographs, videos, plans and online sources as well as relying on the valuer's existing knowledge where they have previously valued stock. Valuers may also agree as part of their terms to carry internal inspections once restrictions are lifted.
We anticipate that funders will review transactions on an individual basis taking into account considerations such as whether the properties have previously been charged and are known to the funders or whether they are being newly charged. Early discussions with your funders and valuers are recommended to try to agree acceptable solutions.
Land Registry
Guidance at the time of writing this article is that Land Registry Business e-services, which receive the majority of applications, are running as normal. All other services are stated to be facing varying degrees of disruption and there may therefore be delays. It is anticipated that these will mainly affect services that require some degree of human input, such as the processing of registration applications, however as the effects of the pandemic are increasingly felt there is concern that this could extend to other aspects of Land Registry services as well. The cancellation date for requisitions raised in relation to existing applications has been extended until 1 June 2020 but it doesn't appear that priority periods will be similarly extended, presumably due to limitations imposed by the Land Registration Rules.
Our recommendations are:
- Ensure that applications for registration are submitted as promptly as possible following completion.
- Allow additional time for the processing of priority searches, particularly searches of part.
- Obtain title documents now for existing or proposed charging transactions.
Good data and third party information
Good data that can be easily manipulated and accessed by your charging team is always crucial to a smooth and cost-effective charging transaction but in the current climate is increasingly important due to potential third party delays. It may not now be possible to obtain certain documentation or information from landlords and developers due to closures and furloughing of staff. In addition, over 40 local authorities nationally have closed and others are operating a restricted service due to both staff shortages and their inability to work from home. In relation to other searches, we have been advised that Thames Water are not accepting new orders and are operating with severe delays on work in progress. Yorkshire Water are operating a limited service with severe delays.
Ensuring you maintain accurate development records, including discharges of planning conditions and section 106 obligations and copies of buildings insurance policies for leasehold properties avoids the need to source these from third parties which could result in a delay to transactions. The more scheme documents you keep online, the more straightforward it is to retrieve them, even when you are prevented from attending the office.
Where current transactions are impacted by the limitations on third party operations we recommend early discussions with your funders and their advisers to discuss alternative solutions. This could result in increased reliance on search insurance, which we discuss further below, or obtaining indemnity insurance policies to address particular risks.
Execution of documents
Restrictions on accessing your place of work creates challenges for the running of your business generally, however, when it comes to executing legal documents the availability of signatories and the logistics of receiving executed documents are key factors for charging transactions. Land Registry requirements haven’t changed therefore it remains that wet ink signatures are required and restrictions on travel and the closure of some solicitors offices may add further complication to the process. Our advice is to plan ahead to take into account the current circumstances and to avoid delay to the transaction. Flexibility is key and all parties are likely to need to be more innovative in their approach.
Once documents have been executed it's crucial to keep track of where these are being held, how they will be sent to third parties (taking into consideration any urgency to deliver these) and to always retain scanned copies.
By way of further reading, our Governance team has prepared this useful article exploring how you can increase your organisation's flexibility when it comes to executing documents here.
Innovative charging
For the reasons detailed above, charging is currently proving to be more complex and challenging. With this in mind, and recognising that some clients may wish to proceed with charging transactions fairly rapidly due to pressures on their organisations, we are liaising with funders and valuers to consider alternative charging mechanisms to address some of these issues.
Alternatives to traditional charging requirements, such as reduced due diligence requirements, greater reliance on search insurance and wider use of indemnity insurance generally may enable transactions to proceed even in these difficult times. Such arrangements are likely to be led by commercial discussions with your funders and may require greater levels of security.
Further charging considerations
- Is it appropriate to agree to strict conditions subsequent in your loan agreements at this time? Given the general climate of uncertainty you may wish to avoid committing to fixed timescales for compliance which may not be achievable. Solutions may be to include caveats such as Covid-19 clauses to deal with unexpected delays and unanticipated issues and we are starting to see these more generally in legal documentation.
- Regulatory compliance is obviously of fundamental importance to our clients however current restrictions may mean that this is not currently possible. The regulator issued a letter of 26 March 2020 providing guidance to RPs on the running of their businesses at this time and appears to be adopting a flexible approach. It recognised that there will be some incidence of statutory non-compliance and gave assurance that it would take a proportionate regulatory approach taking into account the current context. Despite these assurances RPs should also remain aware of the client confirmations required to be provided under loan agreements in relation to regulatory matters and the potential impact of a default.
Click here for our other article which considers some of the wider implications of Covid-19 on real estate borrowing generally.
Our Real Estate Finance Security team are here to assist with any queries you have in relation to any of the issues raised and are always happy to provide bespoke advice and solutions to meet your charging requirements, particularly in these challenging times.
