Understanding the legal implications before you sign on the dotted line. 

Bridging and development finance can provide the speed and flexibility property investors and developers need to secure opportunities quickly. Whether you're purchasing a development site, refinancing an existing property or funding refurbishment works, specialist lenders can often move significantly faster than traditional banks. 

However, speed and flexibility come with additional legal obligations. Before funds are released, lenders will usually require a comprehensive package of security, and it often extends well beyond the property itself. 

Many borrowers are surprised to discover that the lender's security can include personal guarantees, debentures over company assets, charges over shares and security from connected companies or individuals. 

Before entering into any finance transaction, it's important to understand not only what security is being provided, but also the powers that security gives to the lender and the potential consequences if the loan falls into default. 

Key takeaways 

  • Bridging and development lenders rarely rely solely on the property as security. 
  • Borrowing through an SPV often means directors or shareholders may be asked to provide additional security. 
  • A lender's rights can extend beyond the property itself to company assets, shares and personal guarantees. 
  • Understanding the lender's enforcement rights before signing finance documents is essential. 
  • Taking legal advice at an early stage can help identify risks and avoid delays. 

First legal charge: the foundation of a lender's security 

The cornerstone of most bridging and development loans is a first legal charge over the property being acquired, refinanced or developed. 

A legal charge gives the lender a proprietary interest in the property and is usually its primary source of repayment if the borrower fails to meet the terms of the loan. 

Why do lenders require a legal charge? 

The lender is advancing funds against the value of the property and therefore wants the ability to realise that asset if the loan is not repaid. 

In most transactions, the lender will insist on holding a first-ranking legal charge, meaning its security takes priority over any subsequent lenders. 

What powers does a legal charge give the lender? 

Although the borrower remains the legal owner of the property while the loan is performing, a legal charge gives the lender significant enforcement rights following a default. 

These may include the ability to: 

  • appoint a receiver over the property; 
  • take possession of the property; 
  • collect rent directly from tenants; 
  • manage the property; 
  • complete or preserve development works in certain circumstances; and 
  • sell the property to recover the outstanding debt. 

What happens if the borrower defaults? 

Default does not necessarily mean missing a repayment. Loan agreements typically contain a range of events of default, including: 

  • failure to make payments when due; 
  • insolvency of the borrower or guarantors; 
  • breaches of financial covenants; 
  • unauthorised disposals of property; 
  • breaches of planning or development obligations; 
  • material adverse changes affecting the borrower or project; and 
  • breaches of other obligations contained within the finance documents. 

If a default occurs and is not remedied, the lender may enforce its legal charge and ultimately sell the property. 

For developers, this can have significant commercial consequences, including the loss of the development site, disruption to the construction programme and the loss of anticipated profits. 

Debentures: security over a company's wider assets 

Where the borrower is a limited company, lenders will almost invariably require a debenture. 

Many borrowers focus solely on the legal charge over the property and overlook the significance of the debenture. In reality, it is often one of the most powerful documents within the lender's security package. 

What is a debenture? 

A debenture creates security over substantially all of a company's current and future assets. 

Depending on the business, this can include: 

  • bank accounts; 
  • rental income; 
  • contracts and contractual rights; 
  • book debts; 
  • goodwill; 
  • intellectual property; 
  • plant and machinery; 
  • insurance proceeds; and 
  • other business assets. 

Why do lenders require a debenture? 

Particularly in development finance transactions, the property itself may not represent the lender's only concern. 

The lender may also wish to secure income streams, contractual rights under building contracts, warranties, insurance proceeds and other assets connected with the development. 

What happens if a debenture is enforced? 

If the borrower defaults, the lender may be able to: 

  • freeze or control company bank accounts; 
  • collect money owed to the borrower; 
  • enforce fixed charges over company assets; 
  • appoint administrators or receivers (subject to the terms of the security and applicable legislation); and 
  • take control of the company's business and assets to recover the outstanding debt. 

For companies operating multiple developments, enforcement may affect not only the funded project but wider business operations. 

Personal guarantees: liability beyond the borrowing company 

Many property investors acquire and develop property through special purpose vehicles (SPVs) or limited companies. Whilst this structure offers commercial and tax advantages, lenders frequently seek additional protection through personal guarantees. 

A personal guarantee is a legally binding promise by an individual to become personally liable if the borrowing company cannot meet its obligations. 

Why do lenders require personal guarantees? 

Lenders often view SPVs as asset-light vehicles whose only substantial asset is the funded property. 

Personal guarantees demonstrate commitment from the individuals behind the transaction while providing the lender with an additional route to recover any outstanding debt. 

What are the risks? 

If the lender suffers a shortfall after enforcing its security, it may pursue the guarantors personally. 

Many guarantees are provided on a joint and several basis, meaning one guarantor could become liable for the entire outstanding balance before seeking contributions from others. 

Depending on the circumstances, a guarantor's personal assets may include: 

  • savings; 
  • investment portfolios; 
  • buy-to-let properties; 
  • business interests; and 
  • in some cases, the family home. 

Where guarantees are unlimited, liability may extend to the lender's entire loss together with interest, legal costs and enforcement expenses. 

Third-party security: when connected companies provide security 

Bridging and development lenders may also require security from third parties connected to the borrower. 

This is particularly common where different entities within a group own different interests connected with a development. 

For example, a developer may hold the leasehold interest in a development site through one SPV, while a connected company owns the freehold or another strategically important asset. The lender may require additional security from that connected company to protect the overall value of the transaction. 

The important point is that connected companies remain separate legal entities. 

A company providing third-party security is putting its own assets at risk, even if it is not the borrower and does not receive the loan proceeds directly. 

If the borrower defaults, the lender may enforce against the third-party security provider and that company could lose assets that were not directly involved in the borrowing arrangement. 

Independent legal advice: ensuring security providers understand their obligations 

Lenders will commonly require independent legal advice (ILA) where: 

  • individuals provide personal guarantees; 
  • spouses or family members grant security; 
  • directors provide security over personally owned property; or 
  • connected companies provide third-party security. 

The purpose of independent legal advice is to ensure that the person or entity providing security understands: 

  • the nature of the obligations being undertaken; 
  • the extent of potential liability; and 
  • the consequences if the borrower defaults. 

Obtaining advice at an early stage can also help identify issues before documents are signed and reduce the risk of disputes later regarding whether obligations were properly understood. 

Share charges: security over ownership of the borrowing company 

In larger bridging and development finance transactions, lenders may also require a charge over the shares in the borrowing company. 

Where the borrower is a property-owning SPV, control of the company can effectively mean control of the underlying asset. 

A share charge provides the lender with an additional enforcement option if the borrower defaults. 

Depending on the terms of the security document, the lender may be entitled to: 

  • take control of the charged shares; 
  • exercise voting rights attached to the shares; 
  • appoint or remove directors; 
  • transfer the shares into its own name or that of a nominee; and 
  • sell the shares to a third party. 

For shareholders, enforcement of a share charge could result in the loss of control of the company and, ultimately, the development project itself. 

Understanding your security obligations before borrowing 

Security documents are far more than administrative formalities. They define the rights available to a lender if a project does not proceed as planned. 

For borrowers, understanding the full security package is a crucial part of assessing any bridging or development finance arrangement. 

Before signing finance documents, it is important to consider: 

  • What assets are being secured? 
  • Who is providing guarantees? 
  • Are connected companies putting assets at risk? 
  • What rights does the lender have following a default? 
  • Could enforcement affect other investments or business activities? 

Taking legal advice at an early stage can help identify potential issues, avoid delays and ensure all parties understand the commitments being made before funds are drawn. 

Speak to our commercial real estate team 

At Lewis Denley Solicitors, our Commercial Real Estate team advises property investors, developers and businesses on the legal aspects of bridging finance, development funding and lender security packages. 

Nathaniel Colbran, Commercial Real Estate Team Leader, can assist with reviewing finance documents, advising on security requirements and helping clients understand the legal implications before entering into property finance arrangements. 

To discuss your commercial property finance requirements, contact Nathaniel Colbran and the Commercial Real Estate team on 01403 456430.