Shorter Reads

Coronavirus – HOW WILL IT IMPACT LOAN-TO-VALUE COVENANTS?

One of the covenants particularly affected by any economic downturn affecting property values, is the loan-to-value or “LTV” covenant.

1 minute read

Published 8 April 2020

Authors

Share

Key information

  • Sectors
  • Financial services

Drastic measures implemented to curb the COVID-19 pandemic and the resultant economic disruption are poised to impact a wide range of contractual arrangements, including loan agreements and the covenants contained within them. One of the covenants particularly impacted by any economic downturn affecting property values, is the loan to value or “LTV” covenant.

A typical LTV covenant will provide that the borrower is responsible for ensuring that the total drawn down funds do not exceed a specified percentage of the value of the property acting as security for the loan.

Lenders are typically permitted to treat any breach of the LTV covenant as a borrower default and can then demand early repayment of the loan. However, in practice, banks may instead opt to use covenant breaches as an opportunity to renegotiate more favourable terms (such as requiring “lump sum” capital repayments to remedy the LTV breach and/or increased interest rates).

The purpose of an LTV covenant is of course to ensure that banks have adequate security throughout the life of the loan. They can often be tested as frequently as the lender requires, by appointing a surveyor to carrying out a valuation of the secured property (with the surveyor’s fees typically covered by the borrower).

The following questions arise in considering the impact the pandemic will have on the testing of LTV covenants.

  • whether the quarantine measures implemented by the government make it difficult, if not impossible, for surveyors to conduct a physical inspection as part of their valuation procedure; and
  • whether valuations conducted in the present circumstances could ever be considered accurate and reliable.

Whilst the Royal Institute of Chartered Surveyors (RICS) has not suggested that property valuations should cease, due to the stay-at-home measures currently implemented, surveyors are generally unable to conduct site visits and there are obvious health and safety issues in sending surveyors out on site.  Whilst desk-top valuations are an alternative to physical inspection, these are often deemed inappropriate in large scale financing. As such, it remains to be seen how lenders including the major retail banks will propose to conduct LTV covenant testing.

For surveyors who can continue working under the present circumstances, RICS has indicated that they may need to include ‘material valuation uncertainty’ declarations in their advice and reporting. Borrowers will be rightfully concerned and may seek to challenge the enforcement of LTV covenants backed by potentially inaccurate and unreliable valuations. Whether they are able to do so will of course depend on the exact wording of the terms of their agreement with the bank and the particular limitations or qualifications expressed in the valuation by the surveyor.

If borrowers are concerned about breaching LTV or other covenants as a result of the economic impacts of the pandemic, they should open a line of communication with their lenders as early as possible. Borrowers with more complex debt arrangements should also bear in mind the risk of cross-defaulting on other loans and/or giving financiers the opportunity to engage guarantees and indemnities.

Related latest updates
PREV NEXT

Related content

Arrow Back to Insights

Shorter Reads

Coronavirus – HOW WILL IT IMPACT LOAN-TO-VALUE COVENANTS?

One of the covenants particularly affected by any economic downturn affecting property values, is the loan-to-value or “LTV” covenant.

Published 8 April 2020

Associated sectors / services

  • Banking & financial disputes
  • Commercial real estate
  • Financial services

Authors

Drastic measures implemented to curb the COVID-19 pandemic and the resultant economic disruption are poised to impact a wide range of contractual arrangements, including loan agreements and the covenants contained within them. One of the covenants particularly impacted by any economic downturn affecting property values, is the loan to value or “LTV” covenant.

A typical LTV covenant will provide that the borrower is responsible for ensuring that the total drawn down funds do not exceed a specified percentage of the value of the property acting as security for the loan.

Lenders are typically permitted to treat any breach of the LTV covenant as a borrower default and can then demand early repayment of the loan. However, in practice, banks may instead opt to use covenant breaches as an opportunity to renegotiate more favourable terms (such as requiring “lump sum” capital repayments to remedy the LTV breach and/or increased interest rates).

The purpose of an LTV covenant is of course to ensure that banks have adequate security throughout the life of the loan. They can often be tested as frequently as the lender requires, by appointing a surveyor to carrying out a valuation of the secured property (with the surveyor’s fees typically covered by the borrower).

The following questions arise in considering the impact the pandemic will have on the testing of LTV covenants.

  • whether the quarantine measures implemented by the government make it difficult, if not impossible, for surveyors to conduct a physical inspection as part of their valuation procedure; and
  • whether valuations conducted in the present circumstances could ever be considered accurate and reliable.

Whilst the Royal Institute of Chartered Surveyors (RICS) has not suggested that property valuations should cease, due to the stay-at-home measures currently implemented, surveyors are generally unable to conduct site visits and there are obvious health and safety issues in sending surveyors out on site.  Whilst desk-top valuations are an alternative to physical inspection, these are often deemed inappropriate in large scale financing. As such, it remains to be seen how lenders including the major retail banks will propose to conduct LTV covenant testing.

For surveyors who can continue working under the present circumstances, RICS has indicated that they may need to include ‘material valuation uncertainty’ declarations in their advice and reporting. Borrowers will be rightfully concerned and may seek to challenge the enforcement of LTV covenants backed by potentially inaccurate and unreliable valuations. Whether they are able to do so will of course depend on the exact wording of the terms of their agreement with the bank and the particular limitations or qualifications expressed in the valuation by the surveyor.

If borrowers are concerned about breaching LTV or other covenants as a result of the economic impacts of the pandemic, they should open a line of communication with their lenders as early as possible. Borrowers with more complex debt arrangements should also bear in mind the risk of cross-defaulting on other loans and/or giving financiers the opportunity to engage guarantees and indemnities.

Associated sectors / services

  • Banking & financial disputes
  • Commercial real estate
  • Financial services

Authors

Need some more information? Make an enquiry below.

    Subscribe

    Please add your details and your areas of interest below

    Specialist sectors:

    Legal services:

    Other information:

    Jurisdictions of interest to you (other than UK):



    Article contributor

    Enjoy reading our articles? why not subscribe to notifications so you’ll never miss one?

    Subscribe to our articles

    Message us on WhatsApp (calling not available)

    Please note that Collyer Bristow provides this service during office hours for general information and enquiries only and that no legal or other professional advice will be provided over the WhatsApp platform. Please also note that if you choose to use this platform your personal data is likely to be processed outside the UK and EEA, including in the US. Appropriate legal or other professional opinion should be taken before taking or omitting to take any action in respect of any specific problem. Collyer Bristow LLP accepts no liability for any loss or damage which may arise from reliance on information provided. All information will be deleted immediately upon completion of a conversation.

    I accept Close

    Close
    Scroll up

    Find out about Business

    Find out about Dispute Resolution

    Find out about Individuals & Families

    Find out about Real Estate

    We are Collyer Bristow - The law firm for those that
    value individuality, creativity and collaboration.

    Legal & Pricing info Regulatory InformationAccessibilitySitemapPricing and service information

    Listen to our latest podcast: Budget Miniseries: Impacts on Families with US Connections (Part 1)

    Listen to our latest podcast: Cracking the Code on Directors’ Service Agreements

    Read our latest article: Economist, or just economical with the truth? How can employers respond to ‘fake claims’ on a CV?

    Listen to our latest podcast: Autumn Budget 2024 Special (Part 2)

    Read our latest article: ‘Promoting the integrity of the register’: The new Companies House approach to non-compliance

    ExpandNeed some help?Toggle

    < Back to menu

    I have an issue and need your help

    Scroll to see our A-Z list of expertise

    Get in touch

    Get in touch using our form below.



      Business Close
      Private Wealth Close
      Hot Topics Close