Clarification on Commercial Mortgage with Bank

[somersetsky]

Hello

We are a limited company. My husband and I are directors along with two others who have a commercial mortgage with HSBC on the premises where we operate our business from.

My husband and I rent the premises from the other two directors. The rent is
based on the monthly mortgage repayment.

All four of us attended a meeting with our Local Business Manager at the Bank and my husband received an email attachment of The Mortgage Agreement in Principle which confirmed our discussion at the meeting.

We have a number of questions that stem from the original set up of the mortgage that I really need answers to.

I understand that a Formal Facility Letter is issued on the assumption that all the terms specified in The Agreement in Principle are met. Can either party change these terms in the interim before a Formal Facility Letter is issued?

What happens if the value of a property falls below the initial professional valuation because the proposed refurbishment and conversions specified in The Agreement in Principle have not been carried out?

Do Mortgage Holders need to remain Directors of a specified Limited Company as specified in the Agreement in Principle for the full term of the mortgage?

Is a Full Maintaining Formal Lease for the property required by the bank as part of the bank criteria for a Commercial Mortgage?

Would the Bank have the power to specify who has full control of running a business in a commercially mortgaged property in terms of additional lending to that person?

Thank you very much in advance

 

Hi

Just to be clear, can you clarify your involvement in the mortgage, are you buying into it?

In answer to other questions:

Yes, the bank (or you) can amend terms prior to drawdown.

If the property falls below valuation, then terms will not have been met. The bank will probably amend the terms to reflect the valuation (or just possibly, make a retention to be released when improvements have been made)

It is unlikely that a bank would force anyone to remain a director of a company; however any guarantees given would still stand and judgment on other borrowing (such as overdraft) would be influenced by it.

Hope this helps..

 

[Scousejock]

Is the mortgages in the name of the Limited Company that you are all directors of or is it just owned by the other directors in their names or another limited company.

It sounds like it is in the names of the other directors in some way and therefore the bank are likely to want a full repairing lease in place.

I am an Independent Finance Broker so if you need answers to anything specific just drop me a pm.

 

[somersetsky]

Hi

Thank you very much for responding so quickly and helpfully. Here is the scenario to explain my situation fully.

Firstly, my husband and I have nothing to do with the mechanics or finance of the mortgage. It is held by the other two directors. The arrangement with them was that our rent for the premises would exactly cover the mortgage repayments, which began in November 2009.

We based our business plan on the figures discussed at the meeting and confirmed in the Agreement in Principle. Subsequently the monthly rent doubled. As our landlord, our co-director is insisting that this figure is his monthly repayment figure. We cannot prove this one way or the other as this information is obviously strictly confidential; that is reason for my first question.

Two independent specialist estate agents recently valued the property and also gave us a figure for a fair rent which is almost identical to the figure above - e.g. half what we are paying

The Application in Principle states as a condition that both mortgage holders be listed as
as directors and shareholders of the company at Companies House which they are at the moment. However, they both want to resign.

We do not have a formal lease just an agreement to pay the exorbitant rent (we only agreed to this on the basis that the refurb and conversion was carried out which is has not been). Our co-directors are telling us that the bank insists on a full maintaining lease. We would never take on a full maintaining lease and this was only been mentioned last week.

Basically they want to take the premises back. This premises was boarded up for a year prior to us trading here from 2009 and had no goodwill. We have worked very hard over the last two years (with no involvement from them) and they are expecting us to just 'hand it back'. We also live here. Any comments!?

They are also telling me that the bank will not lend them any more money to maintain the building unless the business is directly under their control.

We are having a meeting with them next week and I really need to be well informed in order to fight my corner so to speak. The high level of rent compared to our turnover is crippling us. Depending on the outcome of this meeting, we might have to put our company into the hands of the liquidator and we will be left with no home, no business and no money and a huge amount of personal debt.

Thank you again in advance.

 

[Scousejock]

I think your biggest problem is that you have done this with no formal agreement or lease in place.

If they are just acting as landlord then the bank would not have insisted on them being directors of the company unless it was presented to them in a way that stated they were directors or would be made directors.

The payments on the mortgage are unlikely to have increased substantially recently as the Bank base rate is very low and has not changed. UNLESS they had a period of interest only and now they are paying capital repayment and therefore they would now be paying more.

I think you need specific legal advice on this and suggest you get a good solicitor asap. It sounds to me like you have build up a good business and they would like to take the building back as you have increased its value as a going concern.

I am also based in somerset so if there is anything I can help with just give me a shout. I know some good local solicitors who you could have an initial discussion with

 

[somersetsky]

Hi Scousejacck

Thank you very much for your reply and kind offer. I definitely need to see a solicitor but time is of the essence.

The old adage ‘Never go into business with ‘friends’ certainly applies here! We trusted them to keep their word. Still, hindsight is a wonderful thing!

We do have a loosely worded rental agreement that basically just specifies the amount of rent to be paid. As I mentioned before, we agreed to this because they promised to carry out major refurbishment and conversion. They have reneged on that promise and have done nothing despite constant pleas.

If they are just acting as landlord then the bank would not have insisted on them being directors of the company unless it was presented to them in a way that stated they were directors or would be made directors.

Here is what it says in The Agreement in Principle
“This offer is subject to the follow conditions being met:
XXX and XXXX XXXXXX to be listed as directors and shareholders of XXXXX Limited at Companies House."

The payments on the mortgage are unlikely to have increased substantially recently as the Bank base rate is very low and has not changed. UNLESS they had a period of interest only and now they are paying capital repayment and therefore they would now be paying more.

No, it is interest only until November. The rent has not changed since all this began in 2009. I dread to think how much the rent will be then. The point is that the initial repayment figure discussed and confirmed in the Agreement in Principle doubled according to them. I just don't believe it. Furthermore, our rent was always only to cover the mortgage repayment.

Here is what it says in The Agreement in Principle
“Two years interest only [ ] Interest to be charged at 4.25% over the Bank of England base rate (which is liable to change from time to time)."

Unsurprisingly, the level of rent has not changed to reflect the Bank of England Base Rate!

Thanks again

 

[Scousejock]

The old adage ‘Never go into business with ‘friends’ certainly applies here! We trusted them to keep their word. Still, hindsight is a wonderful thing!

In some ways it is even more important to have everything very clearly defined when dealing with friends as normally to much is done verbally in these type of agreements

We do have a loosely worded rental agreement that basically just specifies the amount of rent to be paid. As I mentioned before, we agreed to this because they promised to carry out major refurbishment and conversion. They have reneged on that promise and have done nothing despite constant pleas.

The wording in this agreement could be vital my worry is it will be very open and not really give you any protection. Was there a defined lease period, rent reviews and tenants obligation for repairs.

Here is what it says in The Agreement in Principle
“This offer is subject to the follow conditions being met:
XXX and XXXX XXXXXX to be listed as directors and shareholders of XXXXX Limited at Companies House."

It would depend on how this was presented to the bank. I do not believe this was presented as them being typical landlords renting the property to you. If it had they would not normally ask for this is a condition as a normal tenant would never agree to such a thing.

No, it is interest only until November. The rent has not changed since all this began in 2009. I dread to think how much the rent will be then. The point is that the initial repayment figure discussed and confirmed in the Agreement in Principle doubled according to them. I just don't believe it. Furthermore, our rent was always only to cover the mortgage repayment.
Here is what it says in The Agreement in Principle
“Two years interest only [ ] Interest to be charged at 4.25% over the Bank of England base rate (which is liable to change from time to time)."

So what they are telling you is that the bank initially agreed 4.25% over BB but for that payment to have doubled the bank would have to be charging 9% over bank base. I dont think so somehow. Does the rental agreement show a set rate or was it worded that it would would be an amount over BB based on a set amount or linked into the mortgage in any way. It is a bit late now but it is a shame that you never obtained legal advice at the time.

 

[Alan R Price]

Hello

We are a limited company. My husband and I are directors along with two others who have a commercial mortgage with HSBC on the premises where we operate our business from.

My husband and I rent the premises from the other two directors. The rent is
based on the monthly mortgage repayment.

All four of us attended a meeting with our Local Business Manager at the Bank and my husband received an email attachment of The Mortgage Agreement in Principle which confirmed our discussion at the meeting.

We have a number of questions that stem from the original set up of the mortgage that I really need answers to.

I understand that a Formal Facility Letter is issued on the assumption that all the terms specified in The Agreement in Principle are met. Can either party change these terms in the interim before a Formal Facility Letter is issued?

What happens if the value of a property falls below the initial professional valuation because the proposed refurbishment and conversions specified in The Agreement in Principle have not been carried out?

Do Mortgage Holders need to remain Directors of a specified Limited Company as specified in the Agreement in Principle for the full term of the mortgage?

Is a Full Maintaining Formal Lease for the property required by the bank as part of the bank criteria for a Commercial Mortgage?

Would the Bank have the power to specify who has full control of running a business in a commercially mortgaged property in terms of additional lending to that person?

Thank you very much in advance

An agreement in principle is exactly that - an agreement that, all things being equal, will be finalised and embodied in a binding contract - in the case of a bank, a facility letter. It is not legally binding and it is open to either side to propose amendments or modifications before the contract is finalised; however the other side may not want to accept these. So if either side wants to propose changes from the agreement in principle the other side can say no - but be prepared to walk away or have the bank walk away if you cannot agree on any alterations.