Legal issues in the bridging distribution chain

Legal issues in the bridging distribution chain


With legal issues one of the hot topics in bridging at the moment, B&C spoke to Colin Sanders, Chief Executive Officer at Omni Capital, to find out what the problems are, whether the legal aspect of bridging is working to best effect and what improvements can be made…

B&C: How important is the relationship between bridging lenders and their lawyers, and how does it work?

Usually invested in the lender’s underwriting function, it is one of the critical relationships in the bridging distribution chain: if it isn’t working, the entire service process suffers.

From a lender’s perspective, we expect our lawyers to deliver documentation and advice in a thorough and timely way while simultaneously protecting our interests, particularly as regards the viability of our security position. Failure to do so will compromise the risk/reward balance on which we rely.

While founded on the quality of legal advice, the relationship must remain service-orientated at all times. This cannot be taken for granted as lawyers often need to prioritise caseloads. It is therefore incumbent on both sides to ensure standards of delivery are not allowed to slip.

Efficient communication is key to the relationship; as is trust and a good understanding of how each party works. The measure of an effective lender-lawyer relationship is how quickly and painlessly even the most complex problems can be overcome.

B&C: And between brokers and lawyers?

There is an obvious similarity in that speed and quality of advice is of the essence. A good lawyer will always be aware of the broker’s pivotal role in the transaction and behave accordingly.

B&C: What advice do lawyers offer regarding the suitability of bridging finance products?

It differs depending on the lawyer’s relationship. When advising lenders, lawyers will provide specific, often quite technical advice, such as lending to corporate entities or offshore vehicles. They will also be focused on the asset offered as security to ensure the lender’s position is not compromised from a legal perspective.

When advising clients, lawyers will have close regard to the terms and conditions of the product and, in particular, the consequences of default, bankruptcy or failure to exit on time, i.e. the ‘perilous situations’. Of interest, will be default fees and whether these are punitive.

While quite correct to advise their clients regarding certain product characteristics and perilous situations, lawyers should not as a matter of course involve themselves in aspects relating to product suitability and underwriting matters. If they do because they consider they have a duty of care to the client, it should be done in close liaison with the client’s financial adviser who has primary responsibility in this regard.

All in all, good lawyers will always be aware of the extent of their responsibilities and behave accordingly.

B&C: What level of legal fees should customers expect to pay?

Omni Capital’s fee for a standard bridging case starts at £850 plus VAT and increases on a sliding scale proportionate to the loan size.

Clients should expect to pay more if our lending is to a limited company, an offshore vehicle or the case exhibits particularly complexities.

All fees are fully disclosed in our documentation.

B&C: Why are they higher than for a mainstream mortgage deal?

They reflect the work undertaken by lawyers – which can be considerably more than that for a vanilla mortgage product – and the time constraints under which they are often placed.

Bridging is not the same as mortgage lending. While there are similarities, bridging is often more complex and nuanced. For lenders, there is a heightened risk of something going wrong.

B&C: Will more lenders offer joint legal representation?

It’s entirely a matter for individual lenders and what best serves their particular business model.

At Omni Capital, we prefer to keep the lawyer relationships discrete. The advice we rely on from our lawyers is specific to our lending needs and can be quite technical. The advice required by a borrower is likely to be of a different nature needing a distinct legal approach. By keeping relationships separate, we avoid potential conflicts of interest while maximising client choice.

We have a panel of lawyers who are able to meet our needs across a range of circumstances. If necessary, we are more than happy to engage directly with the client’s lawyer, so long as the broker is kept informed.

This flexible and comprehensive approach allows us to deal efficiently with most contingencies. We therefore see no pressing need to alter unnecessarily a model that works.

B&C: Is the legal aspect of bridging working to best effect?

It would be complacent to suggest that anything in bridging works to its best and most efficient ability. Of course the legal component could be better, but the experience will vary from lender to lender and broker to broker.

Our own experience indicates that a number of law firms have struggled to adapt quickly to the rapid changes seen in bridging over the past couple of years. While technically capable, some simply do not have the necessary specialist resources or mindset to cope with the demands of bridging. In response, we have seen the emergence of a new generation of law firms keen, willing and able to tap into the rich seam that is bridging.

We believe their involvement is bound to raise the level of competition and, as a consequence, the overall quality of service and delivery.

On the client side, we frequently encounter lawyers who are insufficiently literate in the bridging process. This adds considerably to the stresses of what is often an already complex process. The broker may be able to assist, but it can be a gruelling process. That said, we don’t see it as a compelling argument in favour of joint representation.


B&C: What improvements can be made?

Improvement will come through increased competition among law firms and by bridging continuing to become better understood and more widely used.

But innovation has its part to play too. By way of example, we were impressed by the recent news from Danny Waters of Enterprise Finance that he has established an in-house legal service. Available to all Enterprise clients, it promises to eliminate many of the frustrating aspects of the legal component. This is forward-thinking at its very best.

Leave a comment