07/10 Conditions precedent and property finance transactions
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In a contract, a condition precedent is an event, act or state of affairs which must take place or exist (unless its non-occurrence is excused or waived) before performance under a contract becomes due, i.e. before any contractual duty arises.
In this bulletin, we consider why conditions precedent are needed in property finance transactions and look at some of the most common.
What are conditions precedent?
In a property finance transaction the lender will require that the borrower satisfies the conditions precedent before the borrower delivers a drawdown notice to the lender and the lender will be obliged to lend the money. The conditions precedent are usually set out in a schedule to the facility agreement. The importance of conditions precedent is often underestimated. They are an integral element and underpin the whole finance transaction.
The purpose of conditions precedent is to:
| 1 | provide the lender with the necessary evidence that the representations and warranties made by the borrower in the facility agreement are true; and |
| 2 | support the assumptions that the lender has made about the borrower and its ability to repay the loan. |
The facility agreement comes into effect on execution and from this date the borrower will be bound by the covenants, the representations and warranties and the obligation to pay fees. In contrast the lender will not be obliged to lend until the conditions precedent have been satisfied.
The typical conditions precedent that are required in a standard property finance transaction and a short commentary of the requirements are discussed below.
Corporates
Constitutional documents - the lender will require certified copies of the constitutional documents of the borrower to enable it to check that the borrower is an existing valid company and that it is within its corporate capacity to undertake the transaction and that it will not be "ultra vires". Although the "ultra vires" rule was theoretically abolished by statute, it is generally accepted, for reasons beyond the scope of this article, that it remains essential for lenders to be satisfied that the borrower has sufficient powers.
If the borrower has previously provided the constitutional documents it may be that the lender agrees to a certificate from the Company Secretary confirming that there have been no changes since the date the constitutional documents were last provided to the lender.
Board resolutions - in addition to the constitutional documents the lender will need to be satisfied that the borrower has held the necessary board meetings to authorise the transaction and in particular the entering into of the facility agreement and other security documents. The board resolutions must refer to all documents that the borrower needs to enter into and approve either the execution documents or at least the final drafts of the documents.
Directors certificate - the borrower will also need to provide a certificate from a director confirming the following:
| 1 | that the borrowing of the advances in the facility agreement in full will not cause any borrowing, guarantee or similar limit binding the borrower to be exceeded; |
| 2 | that the constitutional documents and resolutions of the board of directors are a true and complete copy and the resolutions remain in full force and effect; and |
| 3 | the details of its officers authorised to sign or execute as deeds the security documents and any communications and documents relating to them and that the specimen signatures on the signature list annexed to the certificate are their true signatures. |
Although the borrower would be bound by the documents if the officer signing was purporting to have ostensible authority, the lender prefers to have as much evidence as possible that the officer signing had authority.
Security documents
The borrower will be required to enter into documents granting security to the lender, e.g. a legal charge over the property, a debenture over the borrower's assets or a guarantee from a shareholder, director or associated company.
Property
Property due diligence - in a property transaction the lender will require property due diligence to be undertaken to ascertain that the borrower has good and marketable title to the property and that it will constitute good and valid security for the lender. The due diligence may take the form of a certificate or report on title and may be prepared by either the borrower or the lender's solicitors. If the borrower's solicitors undertake the property due diligence the lender's solicitors are usually asked to provide an overview report.
Indemnity insurance – as a result of the property due diligence it may become apparent that there is some title defect (such as a restrictive covenant as to use) or liability (environmental or chancel repair) which the lender will require the borrower to obtain indemnity insurance against. If this is the case the indemnity insurance may be a condition precedent.
Valuation - the lender will have also instructed a valuation of the property and the valuer has to sign off that the matters in the report or certificate of title do not adversely or otherwise affect its valuation to the lender. In some circumstances the valuer may seek legal clarification of issues such as environmental or planning to enable him to produce his valuation.
Insurance – the lender will require evidence that there is in place sufficient insurance cover over the Property together with confirmation from the relevant insurers that the lender is co-insured or its interest is noted on the insurance policy.
Environmental – if the property due diligence reveals that the property may be or is subject to environmental issues or contamination the lender may require further investigations and possibly further conditions precedent to deal with any risk or remediation.
Post completion - there are also several conditions precedent which are to deal with post completion matters such as payment of SDLT, Companies House and Land Registry fees, registration at Companies House (if necessary) and the Land Registry, delivery or retention of the title deeds to the property and serving of notices of the charge to any Landlord or insurer. These conditions precedent are in place to ensure that the lender's security is registered and the lender is adequately protected in the event of a default.
Although these matters are dealt with either on the day of completion or thereafter the lender will require that undertakings between the solicitors for satisfaction are in place prior to drawdown.
Financial
There are several financial/administrative conditions precedent that the lender may require such as:
| 1 | the latest audited accounts of the borrower; |
| 2 | evidence that the borrower is registered with HM Revenue & Customs for VAT purposes and has elected to waive exemption in respect of the property in accordance with paragraph 2 schedule 10 of the Value Added Tax Act 1994; |
| 3 | a bank mandate duly completed; and |
| 4 | evidence of compliance with the lender's "know your customer" requirements. |
Conclusions
This is a brief synopsis of the usual conditions precedent that a lender will require in a simple property finance transaction where the borrower is a UK corporate entity but it is by no means an exhaustive list. Given the often complex and unique nature of individual transactions additional bespoke conditions precedents, for example greater due diligence for foreign entities and structure specific special purpose vehicles (i.e. unit trusts/pension fund schemes/property funds/charity funds) may be required by lenders.
There is nothing complex about either the definition or in practice the application of a condition precedent. However care should be taken that the relative simplicity does not invoke a attitude of complacency which could undermine the validity and rights under the legal documentation.
Lenders are recommended to seek external legal advice on transactions of a larger nature (or those with specific transaction complexities) and should expect, and it is key that they receive, clear detailed schedules of Conditions Precedent (and their completion status) from their appointed legal advisors.
