A possible surge in defaults due to economic headwinds should result in lenders reviewing their loan books and underlying security, according to law firm Rosling King.

And lenders were warned that given the multitude of factors driving the current economic crisis – including the slump in the value of the pound, rising construction costs and supply chain issues – there is a real possibility that borrowers will default on their loans.

Lenders should be reviewing their books to identify those borrowers who may be more exposed or who may already be showing signs of heading towards breached covenants or missed payments.

Security reviews are an essential element in a lender’s enforcement strategy, confirming the validity of its security over a borrower’s assets; they enable lenders to identify any issues in their lending or security documents.

Loan conditions

A borrower can default on their lending in many different ways and defaults are, of course, specific to each lender under the terms of their loan conditions. 

A security review is likely to focus on:

1. Material risks that security might not be valid / open to challenge
2. Identify any assets which are not subject to valid and effective security
3. Steps the lender could take to rectify any defects
4. Enforcement options available to the lender and any restrictions on those options

Alex Edwards, partner in Rosling King’s banking and finance group, said: “We are facing difficult economic times and lenders should be looking for signs that their borrowers may be facing problems, early interaction is imperative to try and prevent defaults on lending and to maximise recovery options in the event that borrowers do default.” 

Ann Ebberson, partner in Rosling King’s real estate group, added: “There are a number of options available to lenders to enforce their security in the event of a default or breach of security on their loan. The options available to lenders are governed by their security and lending conditions, so it is vital that lenders are aware of their existing security and how it entitles them to act.”  

Some options for lenders to consider include:

1. Exercising your power of sale under the provisions of the Law of Property Act 1925 and selling the security property
2. Seeking repossession of and selling the security property
3. The lender can appoint a Law of Property Act Receiver/Fixed Charge Receiver
4. Enforcing a Guarantee
5. Look at enforcing any collateral warranties that have been assigned to you