Eversheds Sutherland property column: October 2021

Real estate finance: a fresh approach to real estate diligence

Real estate finance comprises many types of transaction including acquisition, investment and development finance. In each case there are a number of diligence options available to the parties involved in the transaction. One size does not necessarily fit all. Instead, it is open to the parties to proceed with any of the options below or to pursue a combination of them suited to the particular transaction and risk profile.

Certificates of title

The City of London Law Society Land Law Committee (CLLS) Certificate of Title (7th Edition, 2016 Update), remain the market standard approach to real estate diligence in an investment finance transaction. The CLLS Certificate is an institutionally prepared and accepted form in which to report. It is recognised as being suitable for use in secured lending transactions, is familiar to solicitors acting borrower side who will be asked to prepare it, solicitors acting lender side who will be asked to review it, and to valuers and lenders who will be able to rely on it. The advantage to using the CLLS Certificate is that apart from some transaction specific amendments the certificate is in a set form and (among other things) contains a number of standard statements and confirmations as to good and marketable title. There is no need to negotiate what these statements are, only what disclosures are to be made against them. This reduces (as much as possible) the negotiation that takes place over the form of the certificate and is the reason that it has been accepted as the standard by most firms in England and Wales.

Preparing and settling a CLLS Certificate is, however, the more labour intensive of the diligence options and it is therefore often the more expensive of the diligence options available.

CLLS Certificate Wrappers

The wrapper was introduced by the City of London Law Society Land Law Committee for use in circumstances where a report on title has been produced in relation to the acquisition of a property for the borrower's benefit, and within a short period after the production of the report, the borrower wishes to finance the property. In effect, the wrapper "wraps around" the existing report on title for the benefit of the funder bringing it up to the full CLLS Certificate "market" standard.

Producing the wrapper is therefore more cost and time effective from the borrower's perspective (and that of its solicitors). From the lender's perspective, the "front end" of the wrapper contains certain additional confirmations to be given by the borrower's solicitors, with the effect that in the wrapper the lender will have the benefit of a document equivalent to that which it would have received if a CLLS Certificate itself had been provided. The wrapper contains confirmations from the borrower's solicitors that they have undertaken the process that they would have carried out  to produce a CLLS Certificate, and that matters affecting or relating to the property that would have been revealed or disclosed by the CLLS Certificate are set out in the wrapper or report.

CLLS Short Form Report on Title (Fourth Edition 2018)

The CLLS Short Form Report on Title is a shorter form of template report on title designed by the CLLS for use in circumstances where some or all of the following considerations apply:

• A transaction involves multiple properties.
• There is limited time available.
• Economies of scale achievable on the diligence are a significant consideration.
• Commercial motivation for the transaction may not be the real estate assets, meaning the real estate issues are a secondary consideration.
• A mixed portfolio of properties is involved where only some are of primary significance.
• Equity value of the real estate is minimal in the wider context of the transaction.

Again, producing a CLLS Short Form Report on Title can be more time and cost effective from the borrower's perspective. From a lender's perspective this form of report is a useful tool where some or all of the circumstances set out above arise and as such can be a good option to consider for some or all of the diligence on large portfolio and corporate led transactions.

High level diligence

In those finance transactions involving a large portfolio of real estate assets or the re-financing of an existing portfolio in relation to which the lender has the benefit of pre-existing diligence, it is open to the parties to proceed with high level diligence in relation to some or all of the assets for the purposes of populating the finance documents and ensuring that there are no restrictions on the grant and registration of the security. High level diligence would typically involve a review of up to date Land Registry official copies of the register entries for each property to confirm:

The registered title number.

• Quality of title.
• Accuracy of the property description.
• That the properties are vested in the correct entity.
• Details of any existing security registered over the properties.
• That there are no Land Registry Restrictions (for example, restrictions requiring certificates or deeds of
• covenant, or in relation to leasehold titles restrictions on dealings) which would prevent registration of new security.

In relation to any leasehold properties, reviewing the headleases for the purposes of confirming:

• Whether landlord's consent to charge is required.
• The terms of any forfeiture provisions.
• That all forfeiture rights are qualified by refence to appropriate mortgagee protection provisions.
• That the insurance provisions provide that the tenant (borrower) has responsibility for insurance.

There are a number of legal technology solutions which can be used in carrying out this type of diligence in an efficient and cost effective manner.

Reliance on existing diligence

Where there is economic or time pressure it may be appropriate to consider whether the lender can rely in whole or part on pre-existing diligence. This is particularly relevant in the case of a re-finance. It is, however, important to carefully examine the purpose for which the existing diligence was prepared and the terms on which it can be relied to ensure it is possible and appropriate for reliance to be extended to the new transaction. Where there is any doubt as to whether existing diligence can continue to be relied on the answer is usually to require the borrower to procure a reliance letter in which the author of the certificate of report:

• Acknowledges and agrees that the period of time for which a claim can be brought in respect of the certificate or report is extended by the reliance letter such that the time limits for claims brought by the addressees will run from the date of this reliance letter.
• Extends reliance as necessary, either by amending the addressee language, and/or acknowledging that the"transaction" for which the certificate/report was prepared will include the new transaction, for example, theproposed amendment and/or restatement and/or replacement of the facility agreement.

Reliance aside, the age of the diligence and the practical value of the certificate of report must also be carefully considered. For more information, see Article, Eversheds Sutherland property column: May 2021.

Indemnity insurance

No due diligence insurance may be considered in addition to a high level diligence exercise and/or where reliance on existing diligence is being considered. This is particularly useful where the transaction involves a large portfolio of properties and risk is mitigated by virtue of the volume of assets involved. While there will be a cost associated with procuring indemnity insurance of this type and the review, amendment and negotiation of the policy by the lender's insurance lawyer it is often a time, and potentially cost effective solution.

Indemnity insurance can also be used to "plug" a gap in relation to specific identified risks, in place of a full diligence process. For instance, search indemnity insurance may be considered appropriate where a CLLS Certificate (or the report on title referred to in a CLLS Wrapper) refers to a suite of searches (or a particular search) that is more than three months old and therefore considered to be out of date. Rather than delaying a transaction while new search results are obtained, a search indemnity insurance policy can usually be procured swiftly, and will cover the risk that a new "up to date" search would reveal a previously unidentified adverse issue. Search indemnity insurance of this type is a commonly used solution where the risk profile is low.

Approach to due diligence

There are a number of possibilities when considering the approach to due diligence on a real estate finance transaction. The CLLS Certificate of Title (7th Edition, 2016 Update) remains the market standard approach, but it is open to the parties to consider each of the diligence options referred to above, or a combination of one or more of them to suit the particular transaction including the risk profile and economic and time pressure. One size does not fit all and there is often a viable alternative to multiple CLLS Certificates of Title.