Now, more than ever, rural estates are looking to raise capital, whether for diversification projects or other purposes. One option is to obtain bank finance and offer land within the estate as security for the loan. However, care needs to be taken in selecting the land offered as security. Choosing the right land at the outset avoids unnecessary complications, wasted costs, and will pay dividends in terms of the speed and ease of drawdown.
Who owns the land to be charged?
Ownership of some estates is split between different members of the same family, held under different trusts or even held by special purpose vehicles. It will generally be easier to offer a lender security over land which is all held within a single ownership structure. If the land to be charged is owned by different people or entities, there may be cross rights and the security will also be more complicated, which one would usually wish to avoid.
If the land is held by an overseas company, a legal opinion from a lawyer in that overseas jurisdiction will likely be required by the bank. This can add to the cost and complexity of obtaining the loan.
Access rights and services
You should select land which can be accessed and used autonomously and independently of other estate land that is not being charged. This might be because the land to be charged adjoins the public highway or because it already benefits from a formal easement over the relevant access roads and tracks. Alternatively, you can offer the bank security over a larger area of land which includes both the private access road and the land through which the key services pass.
If charging the private access road is not an option, you might contemplate granting a right of way over it. However, this will not work; a landowner cannot grant a right of way over land (which it owns) for the benefit of land being charged (which it also owns).
Dwellings that depend on private water pipes or supplies also make for problematic security and are best avoided if possible. The problems that Katy Grylls writes about elsewhere in this Newsletter are as much of a concern for a bank as they are for a buyer.
We have seen several transactions fail because access rights and services were not properly considered at the outset meaning that, many weeks later, different land had to be offered as security.
Occupied or unoccupied?
Whatever the form of occupation (residential tenancy agreement, commercial lease or grazing licence), the bank will want to see the paperwork - ALL the paperwork! So, you need to make sure the occupation is clearly documented and up to date.
If any part of the charged land is occupied pursuant to a residential tenancy, the bank will need to check that all the required documents have been served on the tenant before the tenancy was granted, that (where applicable) any deposit is protected correctly and the right to rent checks have been carried out. If the land to be charged includes accommodation for estate staff, you will need to provide details of their employment contract and possibly also a licence to occupy.
Where any occupation is not documented (eg a family member or old retainer is living in a cottage on the estate with no tenancy agreement in place), the bank will require each adult to sign a form consenting to the grant of the charge. Often the bank will require that independent advice is given to each occupier. Again, this can cause delays and add to the cost.
The ideal land to charge will be land where the occupation position is clear, can be easily reported to the bank and is properly documented (or where only a limited number of individuals would need to provide consent).
There are also likely to be tax issues to consider, in particular relating to inheritance tax (IHT), when selecting the land to charge to the bank. Once upon a time (before 2013) it was possible to use borrowing to help with IHT efficiency – borrowing against residential property to invest in assets that benefited significantly from business or agricultural property relief. This is no longer possible as the IHT liability will attach to the property which would, but for such investment, have benefited from the tax relief. It is important to consider the purpose of the borrowing, and hence the likely impact on future IHT liabilities, when taking out a loan. This is a detailed and complex area and you should take specialist advice at an early stage.
Change of ownership
Finally, an issue which won’t delay drawdown but could make matters more complicated in the long run. If there is any discussion of an imminent change in ownership, especially if this involves a change of trustees, the necessary steps should be taken before the land is charged. Once the charge has been granted and the loan drawn down, you will need the bank to consent to any change in the title structure. The bank might also require the new owners to grant a new charge to the bank and you will have to start the process (and pay all the valuation and legal fees) all over again!
If you require further information about anything covered in this briefing, please contact Susanna O'Leary or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2021