Query on debentures for ltd company mortgages

Hi Ava,

A debenture is a floating charge over the assets of the company registered at companies house.

First question is with a first legal charge against the property why is a debenture required? Is it high risk or high Loan to Value?

A first legal charge ranks before a debenture, but I am not sure if Precise will need the permission of Aldermore first if the property is already an asset of the company and if Aldermore will agree to it. It needs an open conversation with both lenders and your solicitor to check contract terms. Do you have a broker organising this for you?

Hi Neil,

These mortgages are arranged by my broker but I think he normally deals with standard residential products.
Both properties have an LTV of 75%. So I wouldn't say that it is high risk.

Apparently it is Aldermore's standard practice now to require a debenture for all ltd company mortgages.
It is the wording in the debenture agreement that got us all worried (my solicitors and Precise are currently looking into it now - I've sent them the debenture). I won't even try and explain the contents of the debenture but it goes along the lines of charging EXISTING and FUTURE properties by way of legal mortgage or fixed charged.

So in summary:
Property A - Aldermore (needs debenture)
Property B - Precise (doesn't require a debenture)

Both are in progress - not exchanged yet.
So I could still dictate the order of exchange/completion I think.
Worst case scenario I'll just drop one of the purchase (will cost me some money here due to schoolboy error)

I was hoping that if I proceed with Property B first then that should hopefully work around the debenture restriction, given that Precise will already have a first legal charge of Property B, and then go back to Aldermore and tell them about this.

It is just the bit where the debenture mentions "existing and future property" that we were all unsure of. So the solicitors are clarifying it with Precise. Just taking ages!

We did ask Aldermore about a debenture waiver, but this is all very vague and no one seems to know what the process is.
We've just been told by Aldermore to ring customer service once Property A completes, and then take it from there. Going down this route means I am at their mercy!

I'm holding off on exchange/completion, hoping that once I hear back from Precise, we can complete on that first.

Thanks!

Ava, this is a question that has raised it's ugly head with us before. I (as a broker) have raised this with Paragon, and they seemed quite resigned to the fact that another company may have a floating charge over one of their properties and were quite laid back about it. However, let's look at the scenario that you find yourself in and perhaps apply some "what if's".

If you put yourself in the lender's shoes, they are being asked to lend maybe several hundred thousand pounds so that you can buy a property. Now, if it was me, I would want a cast iron guarantee that I would be able to get my money back if it all went wrong. Hence the need to secure the loan. As has already been pointed out, the first charge is the main security. This is going to be a Ltd Company purchase, and there remains the possibility that, if property prices fall dramatically, they may not get all of their money back. So they ask you to Personally Guarantee the loan as well. This means that they could take your personal possessions to settle the debt too, which would include your own residential property, assuming you have one. So this is a second line of defence for the lender.

Finally, if they have absolutely cleared you out as far as your personal possessions are concerned and they have taken the secured residence, the only other option would be to secure payment on other assets of the company, as it is the company that has borrowed the money.

Now it would be interesting to see what would happen if the entire portfolio is in peril of being repossessed; from what I gather from Paragon, that would be one for the solicitors to fight over; perhaps it may be down to the party who makes the first claim?

You are right to raise this point and to seek clarification from both lenders because, as I have said many times before, honest is the best policy.

From what I am aware of, Precise are the only lender who do not need a floating charge over the company assets. However, I can't believe that your lenders have not come across this before. Having said all of this, I suppose it's possible that Aldermore may have changed their wording recently, which has started the bells ringing with the solicitor.

If the wording is stating current and future assets, I guess that it doesn't matter which one completes first; it seems that Aldermore will be able to take action in any case.

Thanks for all the info.

I completely understand the need for all these debentures/personal guarantees etc to protect the lender's interests. I thought this should be a fairly common thing with a limited company obtaining mortgages from different lenders. I certainly never thought this could get so complex.

Given that a debenture seems to be the standard thing that most lenders insist on, it sounds to me like a limited company will be stuck with the first one (the debenture holder). I've heard about debenture waiver being mentioned but have not got much details on this. This is probably just one of the many hidden costs of incorporating, being restricted from accessing the cheapest product on the market and being stuck with the main debenture holder.

I guess I will find out soon in a couple of weeks (if the transaction hasn't fallen through yet!).

Hi Ava

I have just done two new mortgages (one replacing a loan from another lender and one for a purchase) with Aldermore and they were pretty good to deal with. We did have to agree to the debentures, but they agreed to sit behind our other lenders. We did tell them at the start they would have to and they incorporated this into the offers. The reason for this is that we had an issue with another lender (CHL) a few years ago when they would not let another lender have a debenture and this caused us a problem. Fortunately CHL have eased off a bit and they agreed to Aldermore have a debenture (CHL had to provide a letter of non-crystallisation - for a fee).

The process was reasonably smooth although there was the odd heart stopping moment, mainly because we have several lenders involved with differing charges and debentures.

I think you need to take the advice of your solicitor who needs to review the wording of the debentures. You are right to be concerned about getting loans done in the correct order so as to avoid falling foul of debentures. The good news is that I did find Aldermore helpful, so if you explain the situation to them they may be able to steer you in the right direction.

This is perhaps a salutary warning for all those looking to incorporate to save tax; there are hidden costs and impositions. The directors had to have independent legal advice on the guarantees besides the advice of the conveyancing solicitor. The time taken to get two relatively straightforward loans sorted was significant.

Good luck

Graham

Thanks Graham.

Good to know that there is still hope.
My situation sounds a bit simpler than the one you just described, given that my company is newly incorporated and is still a blank canvas.
I'm guessing that these debenture issues will become more common given the increase in the number of buy to let limited companies.

I think my solicitors are dealing with Precise now to get their opinion on Aldermore's debenture. Hopefully they'll be ok with it, and then we can come up with a solution to this "deadlock".

And yes, there are many hidden costs when purchasing through a limited company.
The lenders will insist on the directors getting an independent legal advice from a solicitor who is not involved in the conveyancing process (more money + more delays).

It was a bit of a shock to find it cost my wife and I £600 (inc VAT) to get the Director's personal guarantees done on a £50k mortgage, this on top of the Mortgage advisors fee, mortgage arrangement fees and survey, solicitors fees and stamp duty (3%)is adding about 10% to buying a property at £75k. Despite good returns from being in the Northwest it will still take us 4 years profit to recover these costs.