Coronavirus and its impact on borrowers

Any borrowers with serious concerns regarding their loans should contact their lenders to discuss what options might be available to them in connection with their loans and to ensure that they do not default on their loans, in particular with regards to servicing payments of both principal and interest that may become due in the short term. It is notable that some banks have offered holidays from mortgage payments for customers affected by the ongoing coronavirus situation.

For larger borrowers who have borrowed larger amounts from lenders under more bespoke agreements, their options depend on a number of factors, including how often they pay interest and how long the current situation continues. Loan agreements typically contain provisions that charge a higher rate of interest in the event that a payment is not made when due, and so borrowers who are concerned that they will miss an interest payment should contact their lenders to see whether the lender will be willing to waive any failure to pay interest or principal for the time being and continue to charge the standard rate of interest on the loan in spite of any delay or failure to pay. Should this be agreed, borrowers should obtain this agreement in writing.

When discussing any interest holiday or possible waivers of the charging of default interest with lenders, borrowers should consider when the interest that will not be or has not been paid will be payable. At whatever point businesses are able to operate normally again, it may cause further harm and stress to borrowers to have to pay all of their missed interest payments in aggregate on the first interest payment date that follows the resumption of normal business – this would be a significant payment that a number of borrowers will struggle to meet whilst they are resuming normal business. Borrowers should therefore ensure that they structure the payment of late interest so that it is spread across a number of interest payments so as to minimise further risk to their businesses.

Whilst they might be seeking interest holidays themselves, borrowers who have taken a loan to acquire a building that is currently occupied by tenants should be wary of agreeing rent holidays or other amendments to leases with those tenants or waiving possible breaches of those leases. Borrowers should ensure that they obtain legal advice on whether they are permitted to do this under the terms of their loan agreement as loan agreements often contain restrictions in relation to the rights of borrowers in relation to tenancies and also oblige borrowers to collect rental income promptly from their tenants. Permitting a tenant a rent holiday or waiving a breach of a lease could trigger a breach of the terms of the loan agreement, which would give lenders a number of powers, including the right to enforce any security that has been provided in support of the loan, and a right to demand repayment of all outstanding sums due under the loan agreement.

Developers should also be wary of any stricter measures that the Government may impose, as these measures may lead, directly or indirectly, to the closure of construction sites. Developers should check the terms of any loan agreements that they have entered into to assist with the funding of a development to ensure that any such closure does not constitute an ‘abandonment’ of the site. Should an abandonment occur and continue for a significant period of time (typically 28 days or more, but sometimes less), then this may be a breach of the terms of the loan agreement unless there has been a carve out or some other form of protection drafted into the loan agreement. A breach of the loan agreement would give the lender extensive powers to demand repayment of all outstanding amounts under the loan documents or to enforce any security provided by the developer, which could lead to the developer being forced to relinquish ownership of the development site to the lender.

As highlighted above, there are a number of potential issues for borrowers both in the current climate and in the future once business has returned to normal. Borrowers need to be aware of the terms of their loan documentation, and the first step for all borrowers should be to review such documentation and take legal advice to ensure that they are aware of their options, to minimise the risk to their business both in the short and long term.