When taking out a commercial loan, you might be asked to put up some of your assets as security against the borrowed sum in the event that you default on repayments.
In some cases, this might be property. If you decide to go down this route, you may need to grant a ‘legal charge’ over your property – a document giving your lender a legal interest in your property and the right to sell the property to reclaim the debt if you cannot repay it.
One of the most common questions we receive is how to put this into place.
Our experts respond
Dashna Morarji-Sagoo, a Solicitor in our Banking and Finance team, said: “This is a relatively straightforward process if there are no prior existing legal charges granted in favour of any other lenders.”.
“Assuming there are no prior legal charges, and the new legal charge is to be granted in favour of a lender, the lender will provide you with a form of legal charge.”.
“If the property is already subject to legal charges, if these are to remain, it is likely that the consent of the prior lender will need to be obtained before any new legal charges are granted.”.
“If on the other hand, the prior legal charges are to be removed before the new charge is granted, it will be necessary for us to liaise with the existing lender to obtain the relevant release forms and deal with the redemption of any sums of money due to that lender.”.
“This will also increase the legal costs of granting a charge over your property.”.
“Depending on the internal policy of the lender, the lender may require some property due diligence to be undertaken in relation to the property. This again will increase the legal costs of granting a legal charge over your property.”.
“The legal charge will need to be registered at HM Land Registry and possibly Companies House.”.
The cost of a legal charge
Dashna continued: “Assuming that there are no other third-party lenders involved and this lender does not require any property due diligence to be undertaken, I would estimate that the costs associated with this would be in the region of £1,000 – £1,500 (plus VAT and disbursements).”.
“As referred to above, the costs will increase if legal charges have already been granted to any other third parties.”.
“Please also bear in mind the borrower will also be responsible for paying the lender’s costs in relation to the legal charge.”.
“That said, the normal practice is for the lender to agree its legal costs with you, in advance, any costs or expenses it incurs.”.
“Usually, the lender will use lawyers on its panel for the transaction so that discounted rates are applied (which are cheaper than the normal rates for solicitors) and the lender is likely to obtain two/three quotes for you to select from.”.
“The lender’s costs will vary depending on who it uses, but could be in the regions of £1,500 – £2,000 (plus VAT and disbursements).”
For advice on commercial loans and security, please contact Dashna at DashnaMorarji-Sagoo@palmerslaw.co.uk or by calling 07903 631780.