• Fed up with clients complaining about the amount of the bank’s legal fees?
• Ever been asked why you want to carry out your own due diligence instead of just accepting the borrower’s solicitor’s title report?
• Disappointed at the length of time lawyers take to get to close on a real estate lending deal?
• Believe that by paying your lawyers to carry out real estate due diligence, you are buying the benefit of their PI insurance?
• Have you ever thought there ought to be a quicker, cheaper, easier alternative way to get to close?
If so, then please read on.
Background
The traditional approach in the UK to the property transfer process and to secured lending often involves numerous firms of solicitors duplicating due diligence already carried out by others, as each stakeholder in the process (the site owner/developer/acquisition funder/development funder/ end purchaser/unit tenant/investment funder/ residential mortgagee etc.) seeks to protect its own personal interest. This is most likely to arise in any situation where the intention of the owner or developer is to split up and sub divide a single property into numerous separate leasehold or freehold interests (such as in the case of a new housing development, an apartment complex, a shopping centre, an industrial park etc.).
In the current economic climate business is being encouraged to consider new and better ways of doing things, rather than just sticking to doing what we have always done. In this brave new world where the interests of the consumer are paramount, and TCF (treating customers fairly) is the modern banking mantra, Intelligent Real Estate Due Diligence Limited (iREDD) has developed and is promoting, a modern approach to the use of insurance; (i) to expedite the real estate transfer process; (ii) to simplify the due diligence process; and (iii) to indemnify parties to a transaction without compromising security or value. By adopting this approach significant cost savings can be achieved over the lifetime of a project for the benefit of all parties.
Together with our commercial partner JLT Specialty Limited, iREDD will work with the parties to ensure the proper management of legal risks arising in connection with the acquisition, or taking of security over real estate, so that these real estate risks are effectively transferred to an investment grade, “A” rated European insurer. By properly managing the real estate legal risks, so that these are borne by an insurer better able to bear the same, the Lender secures greater protection.
Under a conventional approach to real estate due diligence, in the event of a loss a Lender may have recourse to its legal advisers backed by their PI insurance but only if it can first prove the legal advisers were negligent – never easy because the PI insurer will act to protect the lawyer and will use every means to oppose the claim.
Under the iREDD approach, we believe that a party wishing to have the benefit of insurance should pay an insurance premium for insurance protection and such party should pay legal fees for legal advice. When it comes to insurable real estate risks, a Lender will secure greater protection by relying on an insurer which has been paid to protect the Lender’s interest, than it will secure by seeking to rely upon a lawyer’s PI insurance, which was effected to to protect the lawyer.
2. How does the iREDD approach work?
A bank making a secured loan to fund a real estate transaction will conventionally require its own solicitors to carry out real estate due diligence on its behalf. Often, the same or substantially similar due diligence may previously have been carried out for the benefit of the Borrower, but the lender will generally require that this be refreshed and/or repeated. Reasons given often include; that the existing due diligence is out of date; or considered defective; or cannot be relied on by the lender because it was carried out by or for the benefit of another party.
Where brought in to assist on a real estate transaction iREDD will work with the parties and the identified insurer to properly assess the quality and value of any due diligence as may already exist, regardless of the identity of the party for whom it was carried out. Having regard to this available due diligence and in consultation with the Lender, the Owner and other relevant parties, iREDD will facilitate an acceptable due diligence strategy. iREDD will consider with the parties (having regard to the nature of the property being developed/charged) whether new/additional searches are absolutely necessary, or whether appropriate insurance is available and can be used for example, to replace or supplement old or missing searches, so as to meet and address any particular concerns or requirements of the Lender. By ensuring that real estate risks are effectively transferred to an investment grade, “A” rated European insurer the Lender will have greater protection and easier and quicker recourse in the event of a claim arising.
Where insurance is placed for the benefit of a lender (“Lender Protection Insurance”) the insurance arrangements will commence on drawdown of the loan and provide cover for the Lender in respect of the amount of the loan outstanding from time to time until the date of redemption. The insurance will protect the Lender, if the Property, as a consequence of an insured risk, suffers a reduction in market value or the Lender suffers a shortfall (loss) in expected recovery following the exercise of its security and the realisation of the charged property.
The precise details and extent of the cover can be tailored in each case to suit the particular needs and requirements of the parties. However, it would be usual for such Lender Protection Insurance to incorporate cover, for the benefit of the Lender against the risk of the charged property not having a “Good and Marketable” title and will incorporate protection for the Lender against any loss being sustained by the Lender should the charge be declared void or voidable as a consequence of any adverse matter insured against. Additional heads of risk, such as environmental risks and the existence of any latent defects in the property, are also available and can be incorporated, relatively easily and inexpensively.
3. Pricing is surprisingly cheap
The cost of effecting a standard Lender’s Protection Insurance, will be a single once-only premium paid by the borrower (but which can be financed as part of any development financing) so that premium installments can be geared to be consistent with an agreed drawdown schedule and the level of the insured indemnity geared to be consistent with ongoing project valuations and loan financial covenants. Typically the cost of such insurance, effected for the benefit of a Lender alone, will be cheaper than a similar policy effected for the benefit of the owner itself and its successors. In either case however, this type of cover is relatively inexpensive compared to the significant legal fees which can often arise for carrying out “defensive”, real estate due diligence.
4. Summary of Benefits of the iREDD approach
• The need for costly, repetitive title examination, searches and enquiries and other “usual” real estate due diligence can be avoided rendering subsequent transfers of the property /or of the bank’s debt easier and quicker.
• All parties (lender and borrower) benefit from a reduction in the time taken for transactions to complete and from associated cost savings.
• The lending and drawdown processes can be made smoother and simpler for the benefit of both lender and borrower as the need of the bank’s lawyer to certify / investigate real estate is supplanted by the independent insurance policy.
• Both the lender and borrower will achieve greater certainty and security.
• The existence and backing of the transaction by a well rated insurer will be particularly helpful should the Lender ever be desirous of securitising its loan book.
• In the event of an insured loss a simple claims procedure exists. There is no requirement on the bank to litigate against legal advisers to prove negligence, as would be the case if seeking to recover under a lawyer’s PI policy.
5. iREDD Core Values
• iREDD is committed to :
- minimising or removing unnecessary duplication of legal due diligence by the use of appropriate insurance indemnities, so as to save time and associated cost for all parties and
- working with relevant parties to identify and analyse relevant risks and to assess what is the most appropriate legal structure
• iREDD believes that legal advisers should be paid for providing legal advice and not for acting as insurers - insurance premiums for insurance protection and legal fees for legal advice.
• iREDD considers that insurable real estate risks are better placed with an insurer which is acting for the benefit of the lender.
• iREDD is convinced that the modern real estate industry deserves a new approach to simplify and expedite the real estate transfer process without compromising security or value.
Contact details
Should you be interested in finding out more about this approach, the benefits and how it might help you, please contact any member of the Intelligent Real Estate Due Diligence Limited team.
Intelligent Real Estate Due Diligence Limited
23 Austin Friars,
London,
EC2N 2QP
T +44 (0) 845 118 0049
Mr Moz Gamble
Director
M +44 (0) 7788 410648
mgamble@iredd.eu
Mr Robert McNally
General Counsel
M +44 (0) 7980 756218
rmcnally@iredd.eu
Director
M +44 (0) 7788 410648
mgamble@iredd.eu
Mr Robert McNally
General Counsel
M +44 (0) 7980 756218
rmcnally@iredd.eu
