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In real estate finance transactions, a borrower will usually be required to grant a charge over their bank accounts to the lender. One of the most important bank accounts from a lender perspective is the "rent account", into which the occupational tenants of the borrower pay their rent. The balance of the rent account is used to service the debt in accordance with the payment waterfall in the loan agreement. The lender will expect to be granted a fixed charge over the rent account and in order to create a fixed charge, will require control over the rent account. Control in this context is usually achieved by the lender being sole signatory on the bank account mandate so that no payments can be made out of the relevant account without its consent.
This is an important feature of a real estate financing, given the importance of the rental income to the ability to service the debt. If a lender's charge over the borrower's rent account is not a fixed charge and was to be re-categorised as a floating charge due to lack of control, in an insolvency scenario, certain other creditors would have recourse to the rent account and the proceeds within it.
It is for these reasons that lenders are focussed on the control that they obtain over the borrower's rent account, and will usually require that the bank mandates are updated to include their signatories as the sole signatories as a condition precedent prior to completion of the financing. However, we are increasingly seeing the bank with whom the rent account is held – the account bank – encountering difficulties for operational reasons in including signatories of an entity (the lender) who is not the account holder on the relevant mandates.
In addition, we are seeing an increasing number of account banks expecting to negotiate or rejecting the standard form acknowledgement of security over the rent account. If an account bank cannot accommodate these requirements, lenders find it difficult to obtain sufficient control over the relevant bank accounts, such as rent accounts.
There may be some solutions to this. The standard market position may move to one where lenders are more comfortable without being sole signatory on the mandates for what would usually be blocked accounts. Short of that, some account banks are able to accommodate specific signing rights being granted, which would potentially provide the lender with a sufficient amount of control for the purposes of their security. There is scope for lenders to include further contractual restrictions within the loan agreement as to how that account can be operated by the borrower rather than relying on the account bank to act in a certain way.
In our experience, clear, concise discussions as to lender requirements with account banks and borrowers from the outset, (and if possible, before account opening) are imperative.
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