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Financing
Discuss the types of real estate security instruments available to lenders in your jurisdiction. Who are the typical providers of real estate financing in your country? Are there any restrictions on who may provide financing?
The legal mortgage is the most common security over real estate taken by lenders. Where legal title to the subject property has been issued, an executed instrument of mortgage is registered with the Singapore Land Authority (SLA). Unlike under common law mortgages, a legal mortgage registered with the SLA operates only as security and does not convey legal title unto the mortgagee.
Where legal title to the property has not been issued, the lenders will take a security assignment over the contract that confers future legal title on the purchaser, and a mortgage-in-escrow (pending insertion of registration particulars) is usually executed, to become the equitable mortgagee of the property. The equitable mortgage will only be perfected to a legal mortgage once the legal title to the property has been issued. Pending this, a caveat is usually lodged against the property on the land register to protect the lender’s mortgagee interest.
In addition to the mortgage, lenders often take assignments of rental proceeds, and if the loan is to finance a property development, a security assignment of building contracts, sale proceeds and performance bonds.
Typical providers of real estate financing in Singapore include major local and international banks, finance companies and, increasingly, alternative financial institutions and property funds. The property loans extended include retail housing loans, land acquisition and development loans, as well as working capital facilities.
Banks and financial institutions regulated by the Monetary Authority of Singapore (MAS) must comply with MAS regulations and directives. Other lenders will need to ensure compliance with the Moneylenders Act 2008.
Is financing available for ground (or head) leases in your jurisdiction? How does the financing differ from financing for land ownership transactions?
Loans secured over leasehold properties are common. Loan quantum restrictions may apply if a significant portion of the remaining lease term has already elapsed.
Certain shorter term leasehold properties (eg, JTC industrial properties) are held by their owners as lessees under a long-term ground lease (often for an initial 20- or 30-year term, sometimes with the right to renew). Such leased properties also have their own legal title comprised in a registered lease. Depending on the remaining lease tenure, lenders will decide the loan quantum and tenure they will extend. Such mortgages are subject to the head lessor’s rights (and indeed the head lessor’s approval of the mortgage).
As a matter of policy to facilitate business activity, over the years, licensed financial institutions and JTC have come to an agreed market position of the mortgagees’ rights over such leased properties that are pre-approved by JTC. These include the mortgagee respecting the head lessor’s approval rights over any intended transferee (eg, if the mortgagee exercises its power of sale).
What is the method of creating and perfecting a security interest in real estate?
The legal mortgage is created by the contracting parties executing the prescribed-form mortgage instrument which is registered with the Singapore Land Authority. The original title deeds (or the electronic equivalent) must also be submitted for registration. The mortgagee usually safekeeps the title deeds after registration.
If the mortgage (including any other relevant security interest described in the Companies Act 1967) is granted by a Singapore company, a charge must be registered with the Accounting and Corporate Regulatory Authority within 30 days from the date of the creation of the security interest in order to protect the priority of the security claim.
Stamp duty of up to S$500 is payable in respect of a land mortgage.
Are third-party real estate appraisals required by lenders for their underwriting of loans? Are there government or industry standards for appraisals? Must appraisers have specific qualifications or required government or industry certifications? Who is required to order the appraisal?
Lenders of real estate-secured loans will typically require a valuation report on the subject property. Each bank or financial institution usually has its own panel of licensed valuers. The valuation costs are usually borne by the borrower.
Property valuers are licensed by the Singapore Institute of Surveyors and Valuers and must meet the institute’s licensing requirements.
What would be the ramifications of a lender from another jurisdiction making a loan secured by collateral in your jurisdiction? What is the form of lien documents in your jurisdiction? What other issues would you note for your clients?
There are generally no restrictions at law on a foreign lender taking a legal mortgage as security over a Singapore property, subject to compliance with the Moneylenders Act 2008 and if regulated by the Monetary Authority of Singapore (MAS), the relevant MAS regulations. However, certain properties (eg, JTC industrial properties) require the head lessor’s approval to any mortgage, and a foreign lender, if not an approved financial institution by JTC, will need JTC to approve the terms of the mortgage.
Registered mortgage instruments are part of the public record and can be extracted by payment of a nominal fee.
The lenders will usually require security agreements to be in assignable form, although if there is any head lessor approval involved, then this may not be possible. In the case of registered security documents such as the legal mortgage, an assignment of the mortgage will need to be perfected by the registration of a variation or transfer of the mortgage.
How are interest rates on commercial and high-value property loans commonly set (with reference to LIBOR, central bank rates, etc)? What rate of interest is legally impermissible in your jurisdiction and what are the consequences if a loan exceeds the legally permissible rate?
Banks or financial institutions usually set property loan interest rates based on an agreed margin and board rates, or with reference to SIBOR (Singapore Interbank Offered Rate) or Swap Offer Rate (SOR), both to be replaced with SORA (Singapore Overnight Rate Average) or the bank’s cost of funds.
The Moneylenders Act (if it applies) prescribes a maximum interest rate moneylenders can charge.
In addition, interest provisions that are construed as penalty clauses may be set aside as unenforceable by the courts. Banks and financial institutions will need to ensure that interest rates (including default interest rates) are not susceptible to challenge on these grounds.
How are remedies against a debtor in default enforced in your jurisdiction? Is one action sufficient to realise all types of collateral? What is the time frame for foreclosure and in what circumstances can a lender bring a foreclosure proceeding? Are there restrictions on the types of legal actions that may be brought by lenders?
Most banks and financial institutions in Singapore prefer court process to pursue debt claims or security enforcement, as it is the most expeditious and cost-efficient process. Lenders can, if unopposed by the defaulted borrower, obtain summary judgment on their claim, although Singapore law now prevents the termination and acceleration of loans by mere reason that insolvency proceedings have been commenced in respect of the debtor company. There are prescribed statutory notice periods, which in some cases parties can contract out of.
Arbitration proceedings for debt claims are also possible; however, if the borrower is uncooperative, court process will still be required to enforce the arbitral award.
Are lenders entitled to recover a money judgment against the borrower or guarantor for any deficiency between the outstanding loan balance and the amount recovered in the foreclosure? Are there time limits on a lender seeking a deficiency judgment? Are there any limitations on the amount or method of calculation of the deficiency?
It is common for security documents to provide that where proceeds from the security property are insufficient to discharge all amounts owing by the borrower, the lenders can pursue the borrower personally for the shortfall.
A six-year statutory time limit applies to any lender seeking a deficiency judgment under the Limitation Act. The limitation period does not apply to any claim occasioned by fraud.
There are no statutory limits on the amount or method of calculation of the deficiency as long as the lender’s claim is consistent with the borrower or guarantor’s obligations under the security documents. However, if the security provider is in insolvent liquidation, the lender is not entitled to claim interest accruing after the commencement of liquidation unless the lender realises the security within 12 months after the commencement of liquidation.
What actions can a lender take to protect its collateral until it has possession of the property?
Mortgage documents usually provide the lenders with powers to appoint receivers to take possession of the secured property, collect income on the property and sell the property.
If an assignment of rental proceeds was executed, the lender may direct a tenant to pay rent into the lender’s designated account. Alternatively, mortgagees-in-possession can receive the income on the property, including rental proceeds from tenants, if the mortgage provides for such powers.
As the mortgagee-in-possession, the lender becomes liable for all outgoings (such as property tax, maintenance fees and utilities) to the property, although the lender may claim for such costs on a reimbursement basis from the sale proceeds or income on the property.
May security documents provide for recourse to all of the assets of the borrower? Is recourse typically limited to the collateral and does that have significance in a bankruptcy or insolvency filing? Is personal recourse to guarantors limited to actions such as bankruptcy filing, sale of the mortgaged or hypothecated property or additional financing encumbering the mortgaged or hypothecated property or ownership interests in the borrower?
It is possible to charge all the borrower’s assets in favour of the lender under an all-encompassing debenture, although such a charge can be limited in favour of preferential creditors in an insolvency scenario.
Otherwise, each security agreement will need to specify the security assets covered by the security agreement.
It is also common for personal guarantees to provide that they constitute a primary obligation coupled with an indemnity, and the beneficiary of the guarantee does not need to first seek recourse against the borrower or other security interests before looking to the guarantor. The guarantor is also usually prevented from pursuing a competing claim with the lender against the borrower.
Is it typical to require a cash management system and do lenders typically take reserves? For what purposes are reserves usually required?
Negotiated loan structures could involve cash management systems. The loan terms could require the borrower to maintain minimum funding amounts in debt service reserve accounts. The lender could also require accounts to be locked, allowing withdrawals for limited purposes (eg, for property maintenance or asset enhancement works).
What other types of credit enhancements are common? What about forms of guarantee?
Lenders in Singapore commonly require additional credit support in the form of guarantees, sponsor support undertakings or equity funding undertakings.
Borrowers can negotiate for guarantees or sponsor support undertakings to be capped or limited.
What covenants are commonly required by the lender in loan documents?
Investment-grade property loans will usually adopt the Asia Pacific Loan Markets Association (APLMA) form of facility agreement, widely regarded as the industry standard.
For property financings involving small to medium-sized enterprise or retail borrowers, the financing documents generally lean in favour of the banks with customary representations, undertakings including financial covenants and security margin covenants as well as events of default. Negative pledge undertakings preventing the borrower’s grant of security over its other assets and personal guarantees are common.
The difference between freehold and leasehold properties is usually addressed in the valuation of the properties.
What are typical financial covenants required by lenders?
For property financings, the key financial covenant would be the loan-to-value ratio.
Where the credit assessment of the financing goes beyond the underlying asset, other financial covenants could include the debt service coverage ratio and the borrower’s tangible net worth.
Financial covenants are periodically tested, with reference to the borrower’s financial statements. The lender may request periodic valuation reports on the property.
What are the requirements for creation and perfection of a security interest in movable (personal) property? Is a ‘control’ agreement necessary to perfect a security interest and, if so, what is required?
The non-immovable property category covers any assets ranging from chattels such as vessels, machinery and equipment to contract claims, receivables and intellectual property rights.
The nature of the security interest is relevant – a floating charge is a charge over a class of property of the borrower but does not attach itself to a particular property within such class. The floating charge crystallises into a fixed charge upon an enforcement event such as a payment default. Thereafter, the lender takes control of the assets and can exercise its power of sale to realise the same.
In contrast, a fixed charge is a security interest that ‘attaches’ itself to the property which is charged and the use of the property is usually restricted. If the chargor defaults on the loan, the chargee may sell the property and have a claim in priority to other creditors over the sale proceeds.
The perfection requirements depend on the nature of the security – security assignments are perfected by serving a notice of assignment on the counterparty. A legal charge is perfected by serving a notice of charge on the counterparty. If the security over the asset constitutes a registrable charge under section 131 of the Companies Act 1967, then a charge must be registered in order to perfect the security interest.
Do lenders require that each borrower be an SPE? What are the requirements to create and maintain an SPE? Is there a concept of an independent director of SPEs and, if so, what is the purpose? If the independent director is in place to prevent a bankruptcy or insolvency filing, has the concept been upheld?
There is no strict requirement that a borrower must be an SPE, although for commercial reasons it is preferred.
From the lender’s perspective, it allows a ‘clean’ assessment of the credit rating of the deal, and the lender can require such additional credit support from the relevant entities or persons or other security assets.
From the borrower’s perspective, it limits liability and recourse, unless the lender also requires recourse to its shareholders or sponsors.
A SPE is usually a private limited company that has no other operations (and hence, liabilities) other than that it is specifically designed for (eg, a property holding company). It is no different from any other Singapore-incorporated company. A Singapore-incorporated company requires at least one Singapore-resident director. There is no requirement that the director must be an independent director.
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