Public & Private

As the dust starts to settle on another hectic round of loan completions in March, it's worth considering whether the whole process could be simplified by the standardisation of registered social landlord loan paperwork.

The theory, of course, is that by using standard paperwork all parties will save the time and cost of negotiating loan documentation. But let's look more closely at the experience of the social housing sector in relation to, say, International Swaps and Derivatives Association documentation.

Interest rate hedging arrangements are documented under the ISDA master agreement, which contains all the necessary mechanical and other provisions – for instance, as to default and termination. Any variables are dealt with in a schedule. The schedule is used to impose specific covenants and requirements on the RSL. However, whereas in other sectors the schedule itself is almost completely standard, and thus standardised documentation can be successfully used, in social housing it is usually the subject of negotiation. Banks and financial institutions offering derivative instruments to RSLs take differing views on what covenants or otherwise need to be imposed on the association over and above those imposed by the ISDA master agreement. Inevitably, the association's own requirements lead to further negotiation.

There is a danger that if the sector went to the trouble and expense of agreeing standard documentation – no small task – the ISDA experience would suggest that on individual transactions the documentation would be heavily negotiated in any event. It is also fair to say that, in relation to loan documentation itself, RSLs negotiate the documents far more extensively than their counterparts in the commercial world.

All of the loan mechanics in an agreement ought to be capable of being standardised.

Unlike in other sectors, nearly everything in a social housing loan agreement would be subject to negotiation

But financial details would be variable. Financial covenants vary enormously from association to association and from funder to funder and, as a result, it would be difficult to say that there is any such thing as a standard RSL financial covenant. Accordingly, all of the financial covenant provisions would need to be negotiated.

The details contained in the provisions relating to security would also vary from transaction to transaction. There is no one valuation basis used throughout the sector. Asset cover varies from funder to funder and from RSL to RSL, as does operation of security substitution and release provisions. Some RSLs' properties are subject to the right to buy, others not and mechanics relating to this vary accordingly. Individual lenders have individual preferences in relation to events of default, covenants and representations, and these areas are perhaps the most heavily negotiated by RSLs in any event. Drawdown procedures and condition precedent concerns again vary from lender to lender and depend very much on the circumstances of the particular transaction.

The almost inevitable conclusion has to be that nearly everything currently contained within an RSL loan agreement would be the subject of negotiation and variation. The task of producing standard documentation would be a fruitless exercise.