Advice on financing a tenanted central London apartment
Insight
In each edition of the Brief, the Farrer & Co Residential Property partners give us a brief insight into their working lives. This month, we provide an overview of advice given to a Singapore‑based bank in connection with the recent financing of a tenanted central London apartment.
The Brief
We were recently instructed by a Singapore‑based bank in relation to a proposed loan secured against a tenanted prime central London apartment in the Royal Borough of Kensington and Chelsea (RBKC).
Executing the Brief
We have an established relationship with the bank and our initial conversation centred on whether the bank should proceed on a joint representation basis (by instructing the borrower's lawyers) or a separate representation basis (by instructing us).
Our client explained that the borrower owns a small portfolio of residential properties, and was behind on existing mortgage payments, so had decided to sell another property within the portfolio and finance the central London apartment to discharge the outstanding debt. We highlighted that while joint representation can be efficient in straightforward transactions, given the borrower's distressed status here, there was a heightened risk of conflicts arising between the parties. All points considered, the bank opted for separate representation on this occasion.
We worked closely with the bank from the outset to identify the key diligence points that could impact on valuation and affordability. We flagged that while the property is tenanted (and therefore income producing), it is let under an assured shorthold tenancy (AST), meaning the tenant will benefit from the tenancy reforms coming into force on 1 May 2026 under the Renters' Rights Act 2025 (RRA). We explained that the introduction of the new tenancy regime under the RRA may create uncertainty around valuations. While lenders will generally benefit from simpler possession rights, the practical reality is that rent reviews will be constrained and it will take longer to evict tenants that are bad at paying rent. The bank understood the risks but was ultimately comfortable from a location and asset value perspective; the lending metrics remained acceptable and the RRA had been catered for by the bank's valuer when reporting on valuation.
We liaised with our banking colleagues to update the covenants in the loan document to ensure that the borrower will need to register themself and the property on the private rented sector database, as well as with the ombudsman, once these go live. We explained to our client that this was an important point under the RRA as, once the database is live, registration will be a prerequisite to serving a valid notice to terminate a tenancy under the new regime (including under Ground 2, which will be the ground typically relied on by lenders).
Once exchange on the borrower's sale was imminent, the borrower was keen to finalise the availability of the loan from our client as soon as possible. While the local search result from RBKC was still outstanding, we had a draft missing local search indemnity insurance policy in hand. Our client confirmed that the bank was comfortable relying on the policy (in lieu of the search result), so we were able to submit our certificate of title and arrange drawdown of the loan.
The debrief
The sale of the borrower's property completed alongside the drawdown of our client's loan, so the borrower has discharged its previous mortgage, and our client now holds security over the borrower's apartment.
