Whilst a large number of GP practices are seeking to take advantage of the all time historic low interest rates, it is important to understand the steps involved in the overall transaction.
Why Refinance?
The obvious reason to refinance is to obtain a lower interest rate. Interest rate savings of at least 1 or 2% have been an historic target. However, with current interest rates being at rock bottom, some advisors recommend that interest rate savings as low as 0.5% could still be worthwhile.
Other reasons for refinancing your debt may include:
Refinancing does not necessarily have to be with a new lender. New arrangements with your current lender can be equally as beneficial, due to the existing relationship that you already have.
Should You Be Concerned About a Redemption Penalty?
A redemption penalty is the fee that you have to pay to your current lender if you choose to switch lenders before the end of your current loan.
The loan agreement that you have with your lender may contain provisions for a redemption penalty. There is no standard fixed mechanism to determine how your redemption penalty will be calculated, and therefore it is important to check your loan agreement to see how the lender will calculate the penalty.
The redemption penalty can change on a daily basis. This is because most, if not all, commercial loans are linked to the money markets whose rates change on a daily basis - they are commonly linked to the London InterBank Offered Rate (LIBOR) - which is the rate at which banks lend money to each other - or gilts - which are U.K Government backed securities.
An excessive redemption penalty puts many off, but it may still make financial sense over the long term for a practice to refinance to a lower rate. You should of course, seek expert financial advice to ensure that your decision to switch lenders is the best business move for your practice.
Why Does the Lender Require a Legal Charge/Mortgage over the Property?
The lender will expect to take a legal charge over the property to secure the debt. The legal charge will be registered at the Land Registry, which enables the lender to protect its security and take control over the property if necessary to ensure outstanding sums are repaid.
What 'Due Diligence' Will a Lender Require?
A due diligence exercise enables the lender to uncover risks that could impact on its lending decision. The lender will want to ensure that the property is good collateral for the loan. This is a key part of the process and issues identified at this stage can have a real impact on the timing of the overall transaction.
The lender will instruct a surveyor to physically inspect the condition of the property and produce a valuation report. This report will establish both the market value and the reinstatement value of the property.
A solicitor will also be instructed by the lender to undertake legal due diligence equivalent to that required when a property is purchased and provide a report. Depending upon the nature of the transaction - and importantly the size of the loan - the lender may require an independent solicitor to separately represent it. A lender which has an existing charge over the property may require due diligence to be redone when a refinance takes place and the lender's requirements here will impact on the total cost of the transaction.
The solicitor will investigate the legal title to the property and carry out various searches, which include a chancel repair liability search, a local authority search, a drainage and water search and an environmental search. Should these searches raise any queries, the solicitor may require additional searches or investigations to be carried out.
Rights of third parties in occupation of the property - with or without a lease - also need to be identified and reported to the lender, as well as the terms of any existing leases. An occupant with inadequate lease terms or undisclosed rights of occupation may prevent the lender from realising its security in the event of default - and so this is something of real importance.
Is Your Legal Title Up to Date?
Where the property is vested in a partnership, the lender will want to know that the legal title is vested in current partners and not those who have retired. This comes up surprisingly often and a refinance often takes place alongside a property transfer to update the registered legal owners.
What Will You Need to Do to Help the Due Diligence Exercise?
You will be required to co-operate with the solicitors' enquiries. It is crucial that you answer the questions put to you accurately and in full - and if you are requested to provide documents you should do so promptly. The speed at which you answer the questions and provide documents will directly impact on the speed and costs of the transaction.
You will be asked for details of the property owners and occupants and for information on statutory compliance and insurance.
Time can be saved by collating all this information in advance.
What Happens Next?
A legal charge is a formal document which needs to be signed by all borrowers as a deed and requires an independent witness to the signatures. Often a lender will require the signatures to be witnessed by a solicitor, which may require a signature meeting to take place.
Where there are numerous partners, it is important to plan around availability and holiday dates to ensure everyone is available to sign when the documents are finalised.
In most cases, funds can only be released once this whole process is complete to the lender's satisfaction.
Overview
A refinance can be a complex transaction and take several months to complete. If you are planning to refinance, we recommend that you engage with your professional team as early as possible.
The team at VWV is well versed with the issues mentioned above and we are always happy to discuss the issues which are likely to arise.
For more information or advice please contact Barry Richards or Ben Willis in our Commercial Property team on 0117 314 5693.