Registering pre-existing security affecting acquired property

Typically, when a property is acquired, any pre-existing security granted by the seller in favour of a lender is released and the liabilities to that lender are discharged from the proceeds of sale (or otherwise released with the consent of the existing lender), and new security is then granted by the buyer of the property to any incoming lender. In certain scenarios, an existing lender and buyer may instead agree that the acquired property will be transferred subject to the pre-existing security. It is important for a lender to seek legal advice so that the correct type of Companies House form is selected, which may be either an MR01 or an MR02, depending on the status of the security. This structure may be more commonly used where:

• an individual who owns property in their personal capacity may wish to transfer the property into a company owned by them;
• portfolio transfers of multiple secured properties, where a related special-purpose vehicle purchaser acquires the properties; and / or
• intragroup transfers, where assets are relocated to a different group company under the same financing arrangements as part of strategic corporate restructuring.

The benefits of structuring a transaction in this way include avoiding: (i) additional Land Registry fees to register new security; (ii) the need to re-regulate any priority arrangements in place; (iii) costs involved in releasing existing security and granting new security; as well as (iv) the inherent risk of any new security not being properly and effectively taken or registered.

If a lender agrees to fund subject to pre-existing security, that lender will want to ensure that its pre-existing security interest is properly protected following the acquisition. Since the buyer has not ‘granted’ the pre-existing security, there is no requirement under the Companies Act 2006 to re-register the security against the buyer. However, it is prudent to do so for transparency, as this will give notice of the security to the world, including any insolvency practitioners of the buyer at a future point or other third party lenders. It will also minimise any potential risk of challenge by a third party.

As such, the pre-existing security should be reflected in the charges register of the buyer at Companies House using the appropriate form at Companies House. There is no set timeframe for doing so, albeit as soon as possible following the acquisition is always preferable to avoid the risk of forgetting.

Furthermore, a lender will be better protected where acquired property is registered land and the pre-existing security over the property is registered at HM Land Registry, as parties will have notice of the security via the title register, and the usual restriction on title will prevent the lender’s interests being overreached.

Conclusion

There are risks to a lender in agreeing to existing security being maintained where a property is transferred to a new company, as how the transaction is structured and documents drafted may impact on registration requirements and enforceability of the security. For this reason, most lenders will prefer to release and re-take new security, giving greater certainty and avoiding the risks and potential pitfalls discussed above.

Our Banking and Finance team can assist if you require legal advice on pre-existing security.