Bridging loans are a complex subject matter and which most generalist lawyers simply won’t be familiar with or understand to a level adequate enough to be able to recognise and formulate a mis-selling claim. Our financial services litigation team will ensure your bridging finance mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the mis-sold short term loan.
Bridging loan companies tend to be predatory and aggressively pursue debt recovery cases to the High Court to obtain an eviction notice once a borrower has defaulted on the loan. Members of our legal team are also insolvency and winding up petition experts so if our clients face winding up proceedings or appointment of receivers as a result of a mis-sold bridging loan we can quickly assist and advise in these areas. It is important to contact specialist bridging loan lawyers immediately because further delay means that the lender takes up all your equity in default interest and court costs.
What is a bridging loan?
A bridging loan is a temporary short term financing option normally with a maturity of less than 18 months secured against a property.
Bridging finance provides fast access to cash ordinarily used by a borrower purchasing a property to bridge the finance gap between the sale date of the current property and the completion date of the new property.
However, bridging loans are ordinarily a financing means of last resort given that they come with much higher interest rates than traditional mortgages and are typically offered by advisers, specialist bridging finance companies and mortgage brokers and are not normally offered by high street banks. Failure to repay a bridge loan will likely lead to repossession and very significant adverse costs consequences.
Case Study: Lender Default Charge of £150k Completely Defeated
Our client was ready, able and willing to redeem a bridging loan except that the Bridging Lender was unlawfully seeking payment of over £150k as a purported contractually agreed default fee (the Purported Default Fee).
Our view was that in fact the Bridging Lender was not contractually entitled to the Purported Default Fee under the Loan Agreement, and even if they were so entitled (which they were not) it would be deemed unlawful under the laws of England & Wales (for operating as a penalty and clog fettering our clients equitable right of redemption).
Our client instructed us on an emergency basis to seek (a) mandatory injunctive relief to permit redemption per the Agreement; (b) injunctive relief to restrain the lender from anticipatory breach of the Agreement; and (c) put the Bridging Lender on notice of an intention to commence legal proceedings to recover very substantial damages should the Lender breach the Agreement.
Our view after our initial fixed fee case review was that no such default fee was due whatsoever. Our advice was not to pay anything at all towards the Purported Default Fee as the contract contained unenforceable penal clauses. Our very robust approach against the Bridging Lender and their legal team worked and forced the Bridging Lender to back down such that our client saved the entirety of the Purported Default Fee.
Who uses bridging loans?
Bridging loans are typically used by landlords, property developers and individuals as additional finance to buy a new property whilst the sale of another property has yet to be completed. However, there has been a trend for lenders to offer bridging finance for alternate purposes including by borrowers:
- purchasing a property quickly for example at an auction;
- renovating or converting a property (which now represents the largest market share of bridging finance);
- covering unexpected business expenses;
- preventing a repossession;
- plugging the finance gap during mortgage delays;
- getting capital investment for a new business start-up;
- needing short term capital investment for business use; or
- purchasing stock or machinery for a business.
Why are bridging loans risky for a borrower?
Whilst personal bridging loans are regulated by the FCA, commercial loans secured against properties for investment are not. Therefore, commercial bridging is unregulated. Unscrupulous lenders may make incorporation of a company a condition precedent of a bridging loan, which on its’ face would means that the loan is unregulated and can lead to hidden charges.
Given the short term focus of bridging finance, bridging loans will also be more expensive and have higher interest rates than a traditional mortgage, typically alongside additional legal and administration costs.
Examples of Bridging Loan Mis-selling claims
Bridging loans to individuals by lenders without a consumer credit licence
Loans made by lenders without a consumer credit licence to individuals or partnerships with 2 or 3 members are illegal under the Consumer Credit Act 1974 provisions, which are now found in the Code of Conduct (COCON) section of the FCA Handbook. If a bridging loan is provided to an individual and partnership by a lender without a consumer credit licence then this may be unlawful (regardless of the purpose for which the loan was made).
Bridging loans to companies solely incorporated to circumvent the Consumer Credit rules
There are circumstances where loan agreements have been made between lenders and individuals, where the lender has stipulated that the loan will only be permitted if the individual incorporates a company as a precedent condition of lending. However, such agreements are potentially unenforceable given that this form of bridging loan has been set up solely to evade the Consumer Credit Act 1974 (which does not offer statutory protection to companies, but only to individuals and partnerships). In this case, if lending is secured upon a charge over land where at least 40% is used as a dwelling by the borrower then FCA regulation through the Mortgage Conduct of Business Sourcebook (MCOB) will arguably offer borrowers protection.
Undisclosed links between brokers and bridging loan lenders
There are situations where an unscrupulous broker will recommend a borrower get the bridging loan from a sister company which will provide the loan financing. In this case, borrowers have a claim against the broker for a breach of the common law duty to advise. Moreover, particulars of claim would also include a claim for misrepresentation as the lender is really acting as the borrower’s agent when the true agency was between the lender and the broker. But for the broker illicitly recommending its’ sister company lender, a borrower could argue that it would have sourced finance at a less onerous rate from an alternate lender.
Bridging loans which make it difficult for the borrower to redeem
Borrowers in loan agreements which have onerous redemption clauses potentially have the equitable right to argue that a court should not enforce the terms of a contract that make it difficult to repay. This equitable doctrine is known as “clogs on the equity of redemption”, Lindley M.R. in Santley v Wilde (1899) 2 Ch 474 provided the first expounding of this equitable principle:
“The principle is this: a mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some other obligation for which it is given. This is the idea of a mortgage: and the security is redeemable on the payment or discharge of such debt or obligation, any provision to the contrary notwithstanding. That, in my opinion, is the law. Any provision inserted to prevent redemption on payment or performance of the debt or obligation for which the security was given is what is meant by a clog or fetter on the equity of redemption and is therefore void. It follows from this, that ‘once a mortgage always a mortgage”Lindley M.R., Santley v Wilde (1899) 2 Ch 474
There are no definitive qualifying circumstances to determine what covenant in a loan agreement amounts to a clog but a court will seek to protect a person affected by adverse circumstances from being a victim of exploitation. For example, onerous penalty clauses or unconscionable repayment provisions (such as redemption only permitted if one lump sum payment is made), may be considered to be caught by the equitable doctrine.
If you suspect that you have entered into a bridging loan which makes it difficult to redeem, then seek legal advice as soon as possible as you may have a claim once the loan agreement has been analysed, the circumstances surrounding the parties entering into the loan have been ascertained, the amount advanced quantified and the nature of the transaction understood.
Misrepresentations by the lender on the nature, terms or tax treatment of the bridging loan agreement
Misrepresentation by a lender entails an untrue statement of fact or law made by a lender (or its agent) to the borrower, which induces the borrower to enter into the bridging loan contract thereby causing the borrower loss. An action for misrepresentation can be brought in respect of a misrepresentation such as:
- a loan disguised as a lease finance agreement (to circumvent regulatory provisions).
- misrepresentations as to the tax treatment of the loan agreement (for example if the broker states either fraudulently or negligently that the borrower can reclaim VAT back).
Borrowers may be able to argue that a guarantee in a bridging loan facility is unenforceable on the grounds of undue influence, unconscionable bargain and/or non es factum. For example, undue influence can be pleaded by a wife against a husband but the scope of undue influence is wider than this- it can include banks, lenders and brokers themselves if there is evidence that essentially shows that the borrower has effectively been told “don’t worry about what the document says”.
Misrepresentation arises in circumstances where the extent of the guarantee is hidden.
Cross-guarantees by companies may be demonstrated to be illegal under common law. This is where the lender requires an arrangement between two or more related companies to provide a guarantee to each other’s obligations (which commonly occurs amongst companies trading under the same group or between a parent company and its subsidiary). Such an agreement means that the parent company commits to paying the lender if the subsidiary fails to make the agreed payments set out in the bridging loan agreement. However, under common law a case can be made out (depending on the facts) that such a cross-guarantee is not made in the best interests of the guarantor and crucially that the lender should have known that.
Unsigned documents, documents signed in blank and altered documentation
There have been cases where borrowers of bridging finance have alleged that a lender has inappropriately used a document signed in blank. Signing any blank form is not recommended at all, which can be fraudulently used against a borrower. When signing in blank, the lender acts as an agent to to fill in the details agreed to by the borrower. However, the key question is the extent of such agency and it is a factual question for the court to ascertain the scope of the agency. The key takeaway is that a broker or lender cannot receive a document signed in blank from a borrower and do whatever they want with it.
Bridging loans provided to inexperienced borrowers
An inexperienced borrower can include for example a borrower with limited grasp of English or who is inexperienced with financial services. In that case, undue influence or unconscionable bargain provides an equitable remedy to protect those from abuse from stronger parties under contract law.
Do I have a professional negligence claim against a financial adviser that has advised entry into a bridging loan?
Our financial services litigation team work in tandem with our specialist professional negligence lawyers in considering a claim against a financial adviser. A high level of trust is placed upon such financial advisers by their clients- many of whom are not sophisticated consumers and rely heavily on the advice given.
If a financial adviser fails to deliver the service to the standard expected of a reasonable professional in that specialty field, then a client has every right to bring a complaint (and court proceedings) if financial or personal loss is suffered as a result.
Why use a Specialist Bridging Loan Solicitor?
Bridging finance is a niche and complex subject matter which most generalist lawyers simply will not be familiar with or understand to a level adequate enough to be able to recognise and formulate a mis-selling claim. Our specialist lawyers are degree level educated in banking and securities law and have professional experience in both financial services regulatory auditing and in litigation against banks, brokers and advisers. This experience has been gained not only at other leading city law firms but at the legal and compliance departments of banks themselves. Our team will ensure your bridging loan mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the mis-sold bridging loan.
We work to achieve our client’s interests by attempting to negotiate with the banks, mortgage brokers or advisers wherever proper and commercially sensible to do so. When the time comes to issue legal proceedings we know how best to do so. If a without prejudice settlement approach is unsuccessful we seek on behalf of our client both litigation funding and after the event insurance policies and prepare and issue a claim without delay. Members of our legal team are also insolvency and winding up petition experts so if our clients face winding up proceedings or appointment of receivers as a result of a mis-sold bridging loan we can quickly assist and advise in these areas.
Our Mis-sold Bridging Loan Lawyers get the best results
We endeavour to make the process as stress-free as possible for our clients and seek to eliminate the possibility of business or litigation failure. We know that each client’s case and business is unique, therefore we adopt a bespoke approach tailored to suit the client’s circumstances. We provide specialist senior legal advice from solicitors and barristers (including at QC level) at the outset when it absolutely matters in choosing the best strategy to follow. We are regularly instructed by regional solicitors’ firms to give specialist litigation advice and support in mis-selling cases. We assist by:
- Issuing legal proceedings & drafting documents/pleadings to support the bridging loan mis-selling claim;
- Assisting you in preparation of evidence to support your mis-sold bridging finance case;
- Appointing the right short term finance experts to ensure the best chance of success in litigation;
- Appointing forensic accountants to assess and report on the refunds and consequential losses due;
- Liaising with the defendant(s) and the Court and/or the Financial Ombudsmen Service;
- Providing first class Court representation and advocacy; and
- Developing (and aiding implementation of) strategies that allow the business to continue or ensuring bankruptcy steps are not taken.
Why should you use specialist bridging lawyers instead of a claims management company?
Claims Management Companies are only regulated by the Ministry of Justice and are not law firms made up legally qualified solicitors and barristers. CMCs can only complain to the Finnacial Ombudsman Service (FOS). They cannot issue legal claims nor represent their clients at Court and may lack expertise in this area. You do not need a CMC to assist you and typically they will simply refer your case to a lawyer for a fee (from the lawyer). We do not accept referrals from CMCs.
Book an Initial Consultation with Our Financial Services Litigation Lawyers
Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and companies in high value bridging finance mis-selling disputes. Our high profile and high value cases regularly appear in the national and international media. We have successfully managed and settled mis-selling court litigation against all major UK banks and regulated financial advisers.
Contact our specialist Bridging Loan lawyers for a consultation: 020 7183 0529
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