The short term finance industry, in particular bridging, has long been associated with high fees.  If this type of financing is used correctly however, it can often save a borrower a significant amount in the longer term. The short turn-around time, associated risks and a dwindling property market must all be accounted for by any responsible lender.

However, in a market that remains largely unregulated, to what extent are the fees levied on top of interest payments justified?

In the first part of a series of articles exploring the largely unseen aspects of the bridging and commercial finance industries, ‘B&C Investigates…’ begins by taking a closer look at how legal fees accumulated by both the lender and borrower are calculated.

A key concern relating to legal fees appears to be the inconsistent ways in which the final amount may be arrived at. Fixed fees follow a coherent structure with the amount remaining fairly consistent, reflecting time and resources expended on each individual case. But, James Bloom, CEO of Regentsmead observes: “Solicitors’ fees are generally too high and they always charge a percentage fee.”

And so, rather questionably, a percentage fee may mean a borrower is required to pay more in legal fees for a less ‘risky’ loan. If a lender is to calculate their legal fee as a percentage of the property value, those seeking to obtain loans with prime location property as security may pay more, even though the loan offers the lender maximum security. Similarly, if calculated as a percentage of the advance, this is not necessarily a parallel reflection of the amount of legal work that has gone into deal.

We spoke to a number of solicitors, surveyors and lenders who were keen to express their views, but, given the competitive and generally guarded nature of fees, a proportion of our sources preferred to remain anonymous.

A surveyor at a top London property firm told us: “The amount of work involved in a job often, but not always, has little to do with the value of the property. More expensive property, say prime residential, can often take less time and work due to better evidence and dealing with experience professionals or clients in a mature market.”

He also echoed the seemingly illogical calculations: “Small property can be in more obscure locations, bought and sold by less experienced persons, can be less well managed and harder to find good evidence. Any lenders attempting to stick to rigid fees based on value completely ignores these significant issues.”

Illustrating how percentage fees may result in inconsistencies, Hinesh Varsani, Partner at Belleveue Mortlakes, a Surveyors and Valuers firm, confirmed that quoting fees on this basis is often misguided. He said, “A typical example of this may be a relatively low value property, for example say £300,000, which if priced according to the lender’s fee scale the inspection/valuation will be undertaken at a relatively low fee. If it transpires that the valuation is for a straightforward three bedroom mid-terraced house, then this fee may be justified.

“However, if it later becomes apparent that the inspection/valuation is of a tenanted shop with upper parts arranged as three studio flats (contrary to its permitted planning use as a three bedroom flat), with one of the studio flats being occupied on a secure/regulated tenancy basis, one can obviously conclude that although both Market Values are £300,000, the latter example would require double/triple the amount of professional time.”

Nonetheless, some solicitors do in fact consider property specifics in each individual deal when charging his clients. Daniel Fireman, Partner at CKFT Solicitors, added, “although our starting point is usually a percentage of the advance (0.35 per cent) subject to a minimum fee of £750 plus VAT and disbursements, this fee will usually reflect not just the loan value but also the nature of the property (commercial/residential, freehold/leasehold or let/multi let), the status of the borrower (individual or corporate/onshore or offshore) and the degree of expedition required.”

He further observed the changing nature of legal work in current financial times: “Generally in our experience the size of a loan has little bearing on the amount of work necessary to protect the lender’s interest, particularly these days when as much time or more is often spent on borrower due diligence than on property due diligence, and the extent of security required by a lender can go well beyond just the traditional legal charge and possibly a debenture and personal guarantees.”

And so it would appear that fixed percentages alone do not sufficiently account for legal work. Instead these pricing structures may reflect the perceived ability of the borrower to pay more if he or she owns a higher value property or requires a larger loan. 

In spite of this, Hinesh Varsani explained that there is a place for legal fees calculated as a percentage. He added: “Fees quoted on a percentage of the Estimated Market Value is generally the case when undertaking higher value/extremely complex property valuations of say £10,000,000 or more which, in our opinion, is an appropriate method of arranging a fee for properties of this nature.”

James Bloom also offered additional reasoning for loan size dependant legal fees. He said: “Part of this is due to very high insurance costs so these do relate in some way to the amount of the loan.”

The surveyor we spoke to agreed with Mr. Bloom. He further explained: “This point [insurance costs] is widely ignored, or not understood by clients and lenders when quoting for fees.

“Insurance costs for surveyors and solicitors have rocketed in recent times as lenders seek to recoup losses after the crash so our fees have to reflect the level of lending. In fact, the RICS recognises that insurance is rising to the extent that valuation as a service is becoming completely uneconomical for some surveyors.

“If this continues, the number of those providing these services will fall; reducing choice on the market and valuation fees will increase even further as demand outstrips supply.”

And so, it is clear that the legal costs associated with short term borrowing are unlikely to fall in the near future. Complex property developments, an increase in personal guarantees and rising insurance costs, to name but a few, are anticipated to drive legal fees.  

Hinesh explained that legal work and time involved in issuing a loan has actually increased since the downturn, despite fees reducing only slightly. He reasoned: “This could possibly stem from tighter lending criteria/guidelines resulting in professionals acting in a far more diligent manner than during the boom period.”

He further added that information is key in ensuring borrowers are paying fair legal costs: “We believe that the most suitable method of fee quoting is on an individual case by case basis when supplied with as much detailed information about the subject property as available. 

“Within our practice, when assessing a fee quotation for a potential instruction, we request as much information about the property and tenancies as possible.  In addition, we undertake initial background research utilising various internet sources (VOA/Land Registry/Lonres/Focus/Google Maps).

“This allows us to gauge the level of complexity and estimate how much professional time should be expected which, when coupled with our knowledge of Market Values, enables us to provide a fair and acceptable fee quote.”

So, knowledge of the property in question must be of paramount concern. It is clear that if all lenders are required to standardise their legal pricing structures, transparency would inevitably result, making for better informed consumers and further speeding up the deal process.

By Alexandra Jones