Understanding the risks of using the family home as security for a business loan

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I wrote this article after I received an email from someone who’d split up with her husband and who discovered that her husband’s bank wanted to repossess the property to pay off a charge taken out against a business loan. When she signed the agreement she had no idea that the consequences could be so serious. Be warned.

How charges against property work
A ‘charge’ means that when the property is sold, the bank is entitled to some of the proceeds of the sale. If you already have a mortgage on the property it will be a ‘second charge’.

SAVVY TIP: That means that the mortgage provider is first in the queue to get their money and the bank that the business loan is secured against is second. If the business loan can’t be repaid or the business goes bust, the bank could force the sale of the property.

If you or your husband/partner is being asked to take a charge against the property, it could be:

1. An all monies charge: Although the original charge will be for a specified amount (to cover a loan or an overdraft), an all monies charge means that the bank’s claim on the property increases as the overdraft or loan rises.

SAVVY TIP: If you, as the non-business partner, sign an agreement for a charge of, say £20,000, you might not be aware that the amount being borrowed has increased. Even if you asked for information about how much was secured against the property, it would only show the amount owing on that day. A week later it could be much more — or less.

2. A charge for a fixed amount: Here the bank has a charge against the value of the property for a specified amount. If you or your partner (whichever one owns the business) wants to borrow more, the charge would have to be changed to provide extra security.

What you should do
If you’re the partner agreeing to the charge being added to the family home, you may feel under pressure to sign up, says Alison Hawes, head of the family law team at Irwin Mitchell in Bristol. “It can feel like a real test of loyalty but the consequences of signing without knowing what you’re agreeing to can be serious.” Alison says you should:

1. Take independent legal advice. This means going to your own solicitor and your husband/partner shouldn’t be allowed to come to the meeting and tell you that the business will go down the tubes without you agreeing to the charge (this may count as ‘duress’).

2. Ask if the business is in trouble. This can be a tricky one because your husband/partner may not be prepared to admit that the business is in trouble and — even if you find out it’s not doing well — you may feel that you want to agree to the charge anyway.

What the solicitor should do
The solicitor should explain the consequences of agreeing to the charge in very clear language so you know exactly what you’re signing up to.

SAVVY TIP: Be aware that if the business owner is taking out a joint loan with his/her business partner, each of them is responsible for the whole lot (it’s called ‘joint and several liability’ and it means the bank can choose which person to go after for the loan).

The solicitor should:

1. Ask for correspondence about the ‘facilities’. Ignore the jargon, correspondence about the ‘facilities’ will spell out exactly how much the business is borrowing. It could take the form of letters or emails.

SAVVY TIP: Your solicitor should find out whether the charge relates to money that’s about to be lent or money that’s already been lent. If it’s money that the bank has already lent, Alison Hawes says it could be a sign that the bank is about to call the loan in.

2. Try and negotiate a limit on the charge. This means the solicitor tries to get the bank to agree that the charge will be for a specific amount and not an open ended agreement. He or she may not be successful as the bank may simply insist that the charge is for ‘all monies’.

What the bank should do
Since 2002 banks have had a responsibility to make sure that the co-owner of the property (the wife/husband or partner of the person taking out the business loan) understands the consequences of doing so.
The bank should ensure that:

  • The wife/partner/husband takes independent legal advice. This means they should go to a law firm that’s not used by the bank and not used by the business owner for matters relating to the business.
  • It sees a ‘certificate of independent advice’ before releasing the money. This is evidence that the wife/partner/husband has taken independent legal advice.

Related articles:

What are your rights if you live with your partner? What to think about before you move in

Buying a property jointly; how to own property if you buy with someone else

Are you affected by financial abuse? What can you do if your partner is controlling over money or abusive?

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