Banking & financial disputes & Commercial real estate


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



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.



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