Land Law: Leases, Charges & Security

Loan Securities and Documentation

• Loan security is a way for lenders to have a fallback plan if the borrower defaults on the loan.
• Security does not eliminate the risk of default; it only mitigates the potential losses during a default.
• A good security must have stability in value, be marketable with sufficient liquidity, be quantifiable and measurable, easy to transfer for use, free from prior claims, and allow the lender to legally enforce their rights over the security.

Collateral Categories

• Depreciating Collateral: Lenders should accurately assess the value of depreciating collateral (e.g., vehicles, plant, machinery) at the time of loan disbursement. The margin of financing should not be overly high. Lenders should periodically update the value of the collateral.
• Fluctuating Collateral: Assets like stocks, shares, and bonds require periodic valuation updates. Lenders should include provisions in the agreement allowing for additional collateral if the security-to-loan ratio falls below a threshold.
• Stable Collateral: Lenders must ensure the legal enforceability of stable collateral (e.g., fixed deposits) is maintained, and that it is not improperly released to the borrower.
• Potentially Appreciating Collateral: Lenders should use professional valuers to assess and update the value of potential appreciating assets. A security agreement must be created and the collateral must be valid against third-party claims. The security interest should also be perfected by notifying the appropriate parties.

Loan Agreement

• The loan agreement details the terms and conditions of the loan, the parties involved, and the execution date. It is a legally binding document to protect the lender's interests.
• Major sections of a loan agreement include: terms of loan facilities, conditions precedent, conditions for drawdowns, ongoing conditions, covenants and credit control, and compliance and monitoring of covenants.
• The agreement should be properly drafted with appropriate clauses, signed by authorized parties of the bank and the borrower, contain payment of stamp duties, be registered with relevant agencies and kept under the lending bank's securities department or in-house legal counsel.

Loan Facilities

• This section describes the types of loan facilities available, their amounts, availability for drawdown, interest rates, repayment schedules, and security requirements.
• The conditions precedent refer to any conditions imposed on the borrower by the bank prior to approving loan facilities. Common examples include a board resolution or disclosure to the bank regarding business arrangements.
• Conditions for drawdowns dictate specific conditions for each drawdown from the available facilities. This is a way to maintain control over the funds.

Continuing Conditions, Covenants and Credit Controls

• Continuing conditions ensure the borrower maintains proper conduct throughout the loan period.
• Covenants are credit control mechanisms that help protect the lender's interest.
• Covenants can be categorized as having a direct financial impact or impacting business continuity.

Common Financial Covenants

• Minimum equity covenant: Requires the borrower to cover losses with new capital within a set timeframe.
• Working capital maintenance: Ensures sufficient current assets and prevents over-reliance on current liabilities. This is typically specified with a current ratio.
• Sinking fund requirement: Requires the borrower to create a specific fund for asset replacement or loan redemption.
• Borrowing and debt restriction: Prevents excessive borrowing and maintains the borrower's financial solvency.
• Dividend payment restriction: Restricts cash outflow to avoid excessive spending.

Common General Covenants

• Valid licenses and trade agreements: Ensures the borrower's business is legally registered.
• Insurance coverage: Stipulates that assets and key executives are covered by adequate insurance policies.
• Non-disposal of key assets: Restricts the sale of specific assets without the bank's prior consent.
• Restrictions on investments outside normal business operations: Restricts investments in activities outside the core business without the bank's consent.
• Restriction on changes in business ownership: Restricts changes in majority shareholdings without the bank's approval.

Property Security

• Land and properties are common forms of security for lenders.
• Two main types of property are those with a title document and those without a title document, each requiring different documentation.

Legal Charge as Security

• A registered legal charge is the best form of land security.
• A Memorandum of Charge, Form 16A under the NLC, must be created and registered to ensure the lender's claim is valid.
• Registration procedures, including timeframes, are crucial to establishing valid security interest.

Creation and Perfection of Memorandum of Charge

• Steps involved in preparing and registering a charge for land or property.

Type of Legal Charges

• First legal charge and second legal charge: First charge has priority over the subsequent, second and any other.
• First party charge and third party charge: First party is directly to the borrower, third party is to a different party.
• Principal charge and subsidiary charge: Principal charge is the main one, subsidiary is secondary.

Legal Assignment as Security

• An absolute assignment involves the transfer of ownership of property by the borrower to the lender, often securing a loan.
• This can involve either the same party or different party scenarios, depending on the specific procedures.

Property under Construction and Sub-Sales

• Documentation of properties under construction or sub-sales must adhere to formal procedures and compliance requirements.

Property under Redemption

• The process for checking and verifying redemption amounts before transactions take place to prevent issues.

Other Security and Documentation

• Fixed deposits, stocks, shares, unit trusts, insurance policies, assets under hire purchase financing, and debentures can also function as security, each with specific documentation requirements.

Guarantee and Indemnity

• Guarantees are another form of credit support to help lenders mitigate risk.
• Types of guarantees include guarantees, indemnity agreements, letters of undertaking, and other related agreements.

Characteristic of Guarantee

• Guarantees are legal agreements where a third party (guarantor) promises to pay a loan if the primary borrower defaults.
• Guarantees involve three parties: the lender, the borrower, and the guarantor.
• A guarantee must be issued by a third party, not the borrower.