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In the wake of the COVID-19 pandemic and its economic repercussions, the need to refinance on existing property loans still remains. During the refinancing process, banks and lenders will appoint their valuation and legal advisors, but are often missing out a critical piece of work to protect their interest: conducting a technical due diligence survey.

And this could prove a costly mistake…

The importance of due diligence

An investor wouldn’t buy an asset without first conducting a technical due diligence survey, with the reliance on the survey being provided to the funder. So why would a lender skip this step when refinancing an asset some five years or longer down the line?

There are many risks in relying solely on a valuation and legal check, when looking to refinance a property. For example, would a valuer pick up on a major building defect? How do you get a clear picture on the condition of the property and whether it’s changed or deteriorated during the period of the initial loan? How do you determine, for example, whether there is something inherently wrong with the structure, the cladding or the M&E installations, which may have a detrimental effect on the valuation figure? These are questions that can only be answered by a technical due diligence survey. So, whenever a property is refinanced, the technical due diligence needs to be in place to provide a full picture of the asset and protect the funder’s interests, which is particularly useful should the loan default during its term and leave the funder holding the asset, warts and all. 

The risks of not getting it right

It’s important to fully understand the condition of a property before making a funding commitment. Not having the full picture can trigger several risks and can negatively impact the funder’s position. For example:

  • Changes in legislation for fire safety and cladding may create a need to revisit your fire strategy. The government have recently announced changes to building safety regulations – the biggest seen in a generation – setting out clear measures for mandatory sprinkler systems, and consistent wayfinding signage.
  • During the term of the lease, the occupier may have carried out alterations that aren’t licenced. This can impact dilapidations recoverability at lease expiry.
  • There may be high cost CAPEX items identified in the survey – for example roofs, elevations or items of key plant that may need to be repaired or replaced. Have the mechanical, electrical and public health systems been properly maintained?
  • Are there any letting voids that would impact service charge recoverability?

The benefits of independent advice

It’s clear that there is a strong case for the need to seek independent advice to check your technical due diligence is in place at the time of refinance, rather than relying on a historic report.

If you would like to talk to us about technical due diligence, or any other real estate consultancy advice, please get in touch with one of our experts.