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In recent months, we have come across a number of situations where bank customers have encountered major problems with Loan to Value (LTV) Covenants. Typically, an LTV covenant is set at the time a loan is taken out and provides that at any time during the term of the loan the capital amount due under the loan shall not exceed a particular percentage of the value of the property held as security for that loan. The loan conditions will usually also state that if the LTV covenant is breached, that entitles the bank to treat the loan as in default, and therefore trigger their ability to change the conditions of the loan (in respect of the length of the term, lending margin or otherwise) or even to call in the loan.
In circumstances where banks are looking to exit certain markets or increase their profitability on commercial loans they are often keen to establish that a breach has taken place. However, because of the draconian consequences, it is vital that care is taken to ensure that this is or has been done correctly.
Examples of the types of issues we have come across are:
• A bank insisting that an LTV covenant had been breached, in circumstances where the loan agreements did not actually contain such a covenant. Without a covenant in the loan agreement, the bank cannot establish a breach and therefore cannot change the loan terms.
• Situations where there are two loans in place, each with different LTV covenants where the correct interpretation and therefore validity of the covenants depends on a detailed interpretation of the loan documentation.
• LTV covenants which contain a specific procedure to be followed in the event of potential breach, for example for the customer to be given the opportunity to add security to remedy the breach, but where that procedure has not been followed.
• Situations where the LTV covenant states that any breach must be tested by an independent valuer, but the bank has assumed that there has been a breach based on internal assumptions of general movements in the property market, without involvement of professional valuers.
• Covenants which are worded ambiguously where one interpretation may favour the bank and one may favour the customer.
• Conflicting references in the loan documentation to differing valuation assumptions, for example market value or vacant possession basis where the use of different assumptions can determine whether or not there has been a breach of covenant.
Claire Collinson Legal is able to advise on disputes relating to loan to value covenants and advice whether procedures set out in loan agreements have been adhered to correctly. Please contact us for further information.