Jonathan Newman

Specialist finance requires a ‘full-fat’ approach

Jonathan Newman

senior partner, Brightstone Law

The first quarter of 2022 has certainly been a busy one for Brightstone Law. We’ve taken on a record number of new clients, recruited some exciting additions to the teams, and bolstered new areas of expertise to deal with insolvency and landlord-and-tenant issues (as the short-term lending community makes its presence felt in the wider buy-to-let market).

There has been plenty of activity both from an originations perspective and on the litigation front. The sector remains strong but competitive – and is showing no signs whatsoever of slowdown.

This tells me a number of things about the current market. First, as predicted, we are seeing more borrowers in stressed financial positions. Some are in a fight-or-flight situation, and when they choose to fight, litigation is becoming more challenging. So we’re seeing an increase not just in litigation, but also in the complexity of those cases. Publicity around Wood v Commercial First has triggered increasing disputes around secret commissions. A fair proportion of the claims are misinformed, or do not present the golden ticket some borrowers are led to believe, but they still need to be dealt with.

Disputes over execution are also on the rise. Thankfully for them, most lenders did not move to full electronic signatures on deeds, but we are still seeing a growth in disputes over amended or annotated facilities, and documents that have been bastardised in the interests of speed.

Other increasing dispute trends include the following: y Undue influence defences, in

which co-owners or third parties have guaranteed debt for projects that have been unsuccessful or the principal has been unable to make repayment. Although such defences rarely succeed, especially where there has been well-prepped and documented independent legal representation, the net result is more complex multi-party litigation, increased evidential burden, increased costs, and significant delay. y Occupation fraud on buy-to-let properties, where the tenancy information appears to have been manufactured in order to raise finance. Professional negligence claims have seen a huge increase of around 500 per cent. These are mainly against surveyors on valuations made between 2018 and 2020, where disposal prices are far behind expectation. y Third-party claims by debtors against their own professional advisers regarding unsatisfactory advice or language comprehension issues.

These are all complex issues and, for inexperienced lenders or lenders with inexperienced legal counsel, they can prove to be a significant and costly stumbling block in business growth.

I have spoken before about the dangers of ‘skinny lending,’ where volume becomes the main driver, every part of the process becomes commoditised and transactional, and risk control and expertise are sacrificed, including the way in which a lender works with its partners, such as its legal advisers. With a skinny model, documents are produced and contracts are executed to a relatively basic level, with little else by way of added value.

A healthy property market disguises the mistakes of taking a skinny approach, but mistakes become exposed in tougher economic conditions, and the complexities we see today are exposing some problems arising from a pared-down operating model. And with registrations taking longer, many problems remain masked until a later day.

Some lenders have been quicker than others to recognise the issue and have taken the decision to invest in ‘full-fat’ support. Many have not.

Every lender wants the best advice, and the most experience, but not all want to pay for it.

I think more lenders will come to realise the benefits of a multi-dimensional, full-fat legal approach to lending and a longstanding trusted relationship based on service and key individuals, with thicker margins to allow for sensible process proportionate to the lend, and with security, caution, and diligence. Fullfat may not be particularly fashionable generally, but for lenders it can be more nourishing in delivering a healthier, more robust and future-proof book.

From a legal perspective full fat means proper diligence, sensible investigation, and the right level of time commensurate with the value of the transaction – and added value, too. Your lawyer is expected to have, and should be able to demonstrate, a broad range of experience over several disciplines, supporting lenders in better understanding the pitfalls of their business and the issues within it – often, pitfalls the lenders may not have experienced themselves. Lawyers should be identifying solutions and enabling correct decisions to be made at speed. It’s in this partnershipbased approach that the bonus value lies, and a skinny model simply does not allow for this.

The complex challenges many lenders are experiencing at the moment are a timely reminder that this is not the mainstream market, where loans are relatively risk-free, easily originated, and unlikely to default – where margins are thin, and costs are unlikely. This is the specialist finance market, and it requires a specialist, full-fat approach.

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