How safe is it to lend money secured on Jersey property?
PRIVATE lending, sometimes called peer-to-peer lending, has become popular in recent years and has long been considered as an investment tool, often producing a higher-than-average return. In the current Covid-19 environment, is it a safe investment?
As with all forms of investment, it is subject to market forces and comes with inherent risks.
Security on Jersey realty is effected by a charge known as a ‘hypothec’. This is created by a contract mortgage or ‘simple conventional hypothec’ passed before the Royal Court or a judicial hypothec effected by the registration of a ‘billet’ which gives rise to an Act of the Royal Court, acknowledging the debt.
The hypothec gives to the holder a right in bankruptcy proceedings to be repaid by the debtor in priority to creditors holding security registered later or unsecured creditors. The hypothec can only exist if there is an underlying loan or debt that remains valid and enforceable. If the debtor tries to sell the property charged by a hypothec, the registered charge would be apparent to the purchaser’s lawyer who should insist on it being repaid and cancelled thereby ensuring the creditor is protected. In any event, the hypothec gives to the holder the right to attack the property charged by the hypothec in the hands of a third party as the hypothec follows the property as well as the debtor.
It might be said that this is a win-win scenario for a lender – guaranteed returns with a relatively low risk investment – but there are important factors which a person should always consider before lending money secured against Jersey realty. This is even more important in times of economic uncertainty or recession.
● What is the security being offered and is the property let? If residential, is it the debtor’s home? If the property is let, will the debtor be relying on the rent to make repayments on the loan? If there is a break in rental payments, will the debtor be able to pay the rent? Currently many tenants are struggling to pay rent and any lender should be aware of the current Covid-19 directions between landlords and tenants (please ask for advice).
● The condition and value of the property and whether the debtor is expected to carry out renovations to the property or redevelop it. This might be put on hold if the debtor cannot source labour/materials or has insufficient funds to pay for them.
● The loan to value (LTV), which is the value of the property to be taken as security compared to the amount of the loan the lender is prepared to lend. Many lenders use the yardstick of 65% (to take into account the potential devaluation caused by a repossession sale) but, in these uncertain times where value may be difficult to assess, a more cautious approach with a lower LTV might be appropriate. It would be wise to have the property valued by a professional valuer or surveyor. There is much uncertainty at the moment about how the current crisis will affect property values.
● The borrower’s source of income and the purpose for which the borrower needs the loan. Many employees have had their contract terms changed with reduced hours or salaries. If this is the case, will they be able to keep up payments?
● Does the borrower have a plan or exit policy for repayment that he or she can rely on?
● The interest rate and net return after costs (the courts can reduce interest rates if they consider them excessive). During the present crisis the courts are likely to be more sympathetic to impecunious borrowers.
● Will the lender have a first priority charge or a second or subsequent charge (which is more risky)?
The more information the lender has about the borrower and his/her intentions, the more likely it is that the lender can properly assess the risk involved and, where possible, avoid later problems.
It must be appreciated, above all, that the object of lending on realty is, first to place the money on loan, at interest and to obtain security through a registered charge; second to cover all costs and expenses; third to recover the interest on a periodic basis or at the end of the loan and fourth and ultimately, when due for repayment, to recover the capital and all outstanding expenses and interest.
If the lender is to rely on the interest on the capital as a regular source of income then such an investment is probably not for him/her as there is no guarantee that such an income stream will be maintained by the borrower. While the lender might have security that covers the capital and interest, if the borrower defaults there can be a considerable delay in recovering outstanding interest if the lender has to pursue the borrower for it.
The security against the property is there in the event of something going wrong. If the debtor fails to pay the interest or capital then the lender’s recourse is to Jersey bankruptcy laws and procedures (advice on which can be provided on request). It must be appreciated that exercising rights in bankruptcy to recover the loan and outstanding interest is expensive, time-consuming and the borrower has his/her own rights, in certain circumstances, to delay or challenge the procedure and this must be considered as an option of last resort.
Lenders should be aware that currently the courts have an embargo against new bankruptcy proceedings due to Covid-19 issues. This means delays will occur if a lender needs to commence proceedings to enforce his/her security.
This article is not to be regarded as legal advice and detailed advice can be provided on request by contacting Robin Troy on 760760 or email@example.com or Tony del Amo on 760760 or firstname.lastname@example.org.
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