Public & Private

An increasing number of registered social landlords are considering whether or not all of their property security should be charged to a security trustee for the benefit of all of their lenders, or at least groups of their lenders. But this is not necessarily the best course of action.

The concept of a security trustee is nothing new. Security trusts were originally required in relation to any syndicated loan – in other words, where there was more than one lender. In such circumstances, one person (the security trustee) needs to hold the security for the benefit of a number of others.

What we are now seeing is a development of this, where RSLs are putting their property security into charge to a security trustee. That trustee holds under a variety of mechanisms, for the benefit of different sets of lenders under different sets of loan documentation. There are mechanisms whereby the security trustee designates particular properties within the security pool as being held for the benefit of particular lenders. Arrangements have even been put in place where the designation or allocation of security does not take place until the point of enforcement. Such arrangements attempt to avoid the constant process of charging and recharging security on each financing and refinancing, and to avoid the lawyers' and land registry fees payable each time a property is charged.

This assumes that each time that a lender accepts a property it will not require any due diligence to be carried out. The lender is expected to rely upon the fact that the property has been put in charge to a security trustee for a (possibly considerable) period of time, and, by implication at least, that the trustee carried out proper due diligence in relation to it.

The purpose of such arrangements is to avoid the constant process of charging and recharging security

But neither of these assumptions is necessarily correct. Most lenders, when accepting property security, will undertake a full due diligence process whereas, generally speaking, an independent security trustee will not carry out this process. When, in turn, security is then designated to a particular lender, it is likely that that lender will wish to undertake that process at that time – to review the certificate of title and other documents provided at the outset. The lender may, as a result, reject security or raise further requisitions in relation to particular items of security. Given that attempting to avoid this process was one of the original reasons for putting the security trustee arrangement into place, it is not unreasonable to question the benefit of the arrangement as a whole.

However, the other rationale, the avoidance of land registry fees, does remain valid. These fees would only be paid when the security was put into place in the first place and would not need to be paid each time a property was designated in favour of a different lender.

Overall, putting these arrangements into place saves future land registry fees (payable on charging for each refinancing) and, possibly, some element of legal fees arising as part of the same process. But for any RSL other than a newly created one whose properties are not yet in charge, properties will be charged variously to different lenders already.