Back to Basics: Cautionary tales on consents

Everything is signed and ready to go. Completion is imminent and the client is anxious to proceed. Then the realisation dawns that you are missing lender’s consent to the transaction. We have all been there. Having to go back to the client to explain that the transaction will be delayed because you are waiting for lender consent is never ideal. That is why it should always be one of your first considerations when undertaking any property work. Always ask yourself at the outset: “Is there a lender involved?” Here we are going to consider how important it is for solicitors to seek lender consent when dealing with property transactions. We will consider the types of transaction where consent will be required, why consent is required and what the consequences are if consent is not obtained but completion still occurs. When is consent required? Where a matter involves a property that is subject to a registered legal charge, the consent of the lender (being the beneficiary of the legal charge) will generally be required to that transaction. The easiest way to check if the property is subject to a charge is to check the charges register of the registered title to the property at the Land Registry, as well as any restrictions on the title. The list of common transactions generally requiring lender’s consent is not exhaustive and we would recommend that on any transaction where an interest is being created or extinguished in respect of a property that is subject to a registered charge, it is best practice to contact the lender to discuss whether their consent will be required. It is always better to be safe than sorry. It is also important to ensure that consent is requested and obtained prior to completion of the transaction. While it is possible to obtain consent retrospectively (considered below), there is less risk of unexpected adverse consequences in liaising with the lender at an early stage to obtain their consent before the legalities are concluded. For example, it avoids the risk of the lender refusing to give consent to a transaction that has already taken place and the effect of that on both the transaction and the legal charge. The potential effects of not obtaining consent prior to completion of a transaction is considered further in the final section of this article. “I thought it was just registerable dispositions of property that needed consent” This is a common misconception. A lender’s consent must be obtained regardless of whether or not the relevant transaction is a registerable disposition. Although the implications of not obtaining consent are more obvious for registerable dispositions by affecting the ability for that transaction to be registered, the potential consequences remain the same whether a transaction is or is not registerable at the Land Registry. Why is consent required? The primary objective for any lender that takes security over a property is to preserve the value of that property in case the lender has to enforce its security to sell the property. The lender wants to be sure the value of the property remains sufficient to pay off the money owed to them following a default by the borrower. Once a property has been charged, the owner is not free to deal with it at will because the decisions made in respect of a charged property have implications for the lender and their security. Generally, lenders are happy to provide their consent to leases, beneficial easements and other transactions that have positive or minor implications on the value of the property. However, in an uncertain market where lenders tend towards a more risk-averse approach, they may consider a seemingly standard transaction to negatively impact the value of the security and are more reluctant to provide consent. So if a transaction is taking place in respect of a property subject to a legal charge (whether or not the transaction has a potentially negative impact on the value of the property) then it is likely that the lender’s consent will be required. What happens if consent is not obtained and the transaction completes? The status of transactions completed without lender consent (excluding transfers) While the transaction looks to be complete with the other side, ie the documents have been dated and the completion formalities undertaken by the parties’ legal representatives, the transaction is in fact voidable in respect of the lender. This means that if the lender exercises its power of sale in relation to the property, following a default in payment (or otherwise by the borrower), they are likely to be able to override the transaction. Therefore, any prospective buyer acquiring the property from the lender would acquire the property free from the effects of the transaction. This seems like a sensible interpretation by the law in order to protect the interests of the lender in a property. If the transaction is registerable, the Land Registry will either not fully register the transaction, by noting the failure to provide consent on the registered title, or by refusing to register the transaction at all. The Land Registry will note on the title that lender’s consent has not been obtained and/or produced on registration of the transaction document and as such: the transaction may be overridden in the event of an exercise of the lender’s power of sale; and/or the transaction is subject to any rights of the lender that may have arisen as a result of its consent not being obtained, including the lender’s right to sue the borrower for repayment, the right to take possession and its rights to exercise the power of sale and other powers given to it in the legal charge. The status of transfers completed without lender consent Transfers are treated a little differently. To perfect legal security, a lender’s charge must be registered at the Land Registry and such registration often includes the registration of a “form P” (or similar) restriction against the relevant title. This restriction means that the Land Registry cannot register a disposal of the property (including a transfer) without the lender’s consent. The effect of this is simple: if no consent is provided, a transfer cannot be registered and will not operate at law until registered. Without registration, the buyer named in the transfer will only acquire an equitable interest in the property and the seller will retain the legal estate to the property, holding the equitable interest on trust for the buyer. This will materially affect the buyer’s ability to deal with the property, including its own ability to secure lending against the property, granting a lease out of or selling the property. Breach of loan terms In many cases, completing a transaction without obtaining a lender’s consent may be deemed to be a breach of the terms of the legal charge. A comprehensive review of the relevant legal charge and underlying loan agreement would be needed to confirm whether this constitutes an event of default for the purposes of the security. If so, the lender is likely to have the right to enforce their security against the property, demand payment in full of the amount secured and, if payment is not made, exercise their power of sale over the property. This will not only affect the borrower financially, but also leave the other party to the transaction without the benefit of the outcome that the transaction was intended to secure. Retrospective consent If you have entered into a transaction without first obtaining consent, do not fear. Lenders can be approached to provide retrospective consent, but they are under no obligation to do so – or to do so quickly – and expect to have to answer a few more questions. Once the retrospective consent has been provided, it will have the same effect as if it had been obtained prior to completion. Relationship between lender and borrower While catastrophe may have been avoided by obtaining retrospective consent, there is still the nature of the relationship between lender and borrower to consider. While a one-off mortgage with no personal relationships having been built may be immune to the effects of such a blunder, a more sophisticated relationship between a lender and a frequent commercial borrower may be more affected by such an issue. While a one-off mistake is likely to be overlooked it is incumbent on the acting solicitor to ensure that this does not happen again, in order to preserve the borrower’s good relationship with the lender. Preparation is key No matter what side of the transaction you act on, it is always important to deal with lender consent right at the outset of a transaction. As a result of the continued impact of Covid-19 on the world, lenders are experiencing sometimes significant delays in processing consents. It is therefore best practice to get in contact with the lender as soon as possible after being instructed to avoid any delays and to ensure that you are in the best possible position to enable a swift and stress-free transaction. When is consent required? Common transactions involving property subject to a legal charge that will generally require the lender’s consent: The sale of a property (or part of a property) Grant or release of easements over a property Grant or release of easements in favour of a property Grant of a lease out of the secured property Assignment of a lease granted out of the secured property Surrender of a lease granted out of the secured property Grant of an additional legal charge Grant of options to purchase or other agreements to dispose of interests in the property Deeds of variation to entries on the register of the property Robert Gambles is a solicitor in the property team at Brabners Next time Rubbish legislation for fly-tipping? A look at the law on fly tipping and waste disposal. Picture © Photofusion/Shutterstock