Legal considerations when borrowing through an SPV

Special purpose vehicles (SPVs) are widely used by landlords, developers, and portfolio investors purchasing property. While much of the discussion around SPVs focuses on tax, the legal structure behind the borrowing is equally important and can create significant problems if not considered properly from the outset.

An SPV is a separate legal entity registered at Companies House, usually a limited company. The company owns the property and takes on the borrowing, while the investors own shares in the company itself. Because many SPVs are newly incorporated entities with limited trading history or assets, lenders will usually require additional protections before financing is approved.

In practice, SPV borrowing often involves a combination of property, corporate, lender, and refinancing considerations that run alongside one another.

What borrowing do SPVs usually take?

SPVs commonly use buy-to-let (BTL) mortgages to finance property acquisitions, although additional legal and lender requirements often apply where borrowing is undertaken through an SPV.

Many lenders prefer SPVs with relatively simple structures and specific SIC codes linked to property ownership or letting activities. Some lenders will only lend to companies established specifically for property investment rather than wider trading businesses.

Unlike a standard residential mortgage:

• The company takes on the borrowing.
• The property is owned by the SPV.
• Directors or shareholders will often provide personal guarantees.
• Additional corporate documentation may be required.
• Lenders may require debentures or wider security.

The legal structure becomes increasingly important where multiple investors, refinancing arrangements, or portfolio growth plans are involved.

Why do lenders treat SPV borrowing differently?

From a lender's perspective, many SPVs represent a different level of risk compared to individual borrowers.

An SPV may:

• Have no trading history.
• Hold limited assets.
• Own only one property.
• Be newly incorporated.
• Involve several investors or shareholders.
• Be undertaking refurbishment or development works.

As a result, lenders often impose additional conditions before funding is approved.

This may include:

• Personal guarantees.
• Debentures over company assets.
• Restrictions on future borrowing.
• Requirements concerning shareholder structures.
• Additional due diligence investigations.

The structure of the company itself can sometimes affect lender appetite and refinancing options later.

What legal issues commonly arise with SPV borrowing?

Many investors focus heavily on the commercial or tax advantages of SPVs without fully considering the wider legal structure behind the transaction.

Common legal issues include:

• Personal guarantee exposure.
• Weak shareholder arrangements.
• Refinancing complications.
• Historic liabilities within existing SPVs.
• Problems transferring shares later.
• Debentures restricting future borrowing.
• Leasehold restrictions affecting lender security.
• Funding delays close to completion.
• Poorly structured joint venture arrangements.

These issues often become more significant as portfolios grow or additional investors become involved.

Does SPV borrowing require personal guarantees?

Often, yes. Because the SPV itself may have limited assets or trading history, lenders commonly require directors or major shareholders to provide personal guarantees.

Where multiple investors are involved, guarantees are frequently structured on a joint and several basis. This means a lender may pursue one guarantor for the full debt if the others cannot contribute.

Guarantees should always be reviewed carefully before finance documents are signed, particularly where:

• Friends or family members are investing together.
• Ownership percentages are unequal.
• Passive investors are involved.
• Future refinancing is anticipated.
• The SPV is acquiring multiple properties.

Can SPV structures affect refinancing later?

Yes. Refinancing issues are one of the most commonly overlooked aspects of SPV borrowing.

Problems can arise where:

• The shareholder structure changes.
• Existing debentures restrict further borrowing.
• Personal guarantees remain in place.
• The SPV structure becomes too complicated for lenders.
• Historic liabilities affect lender appetite.
• Properties are transferred between SPVs.

Investors often focus heavily on the initial acquisition without fully considering how future refinancing or restructuring will operate.

What role do debentures and lender security play?

Lenders often require wider security beyond simply taking a legal charge over the property.

This may include:

• Debentures over company assets.
• Fixed and floating charges.
• Restrictions on future borrowing.
• Shareholder undertakings.
• Security over rental income.

These arrangements can affect how the company operates after completion and may restrict future restructuring or refinancing options.

What due diligence is involved in SPV borrowing?

SPV borrowing often involves both property and corporate due diligence. Depending on the transaction, this may include reviewing:

• Company records.
• Existing liabilities.
• Shareholder structures.
• Corporate filings.
• Existing lender security.
• Property title.
• Lease documentation.
• Tenancy arrangements.
• Planning and regulatory compliance.

Where an investor is purchasing an existing SPV rather than setting up a new company, due diligence becomes particularly important because liabilities sitting within the company may transfer with the acquisition.

Guidance on SPV borrowing and investment structures

Borrowing through an SPV can create valuable opportunities for investors, landlords, and developers, but the legal structure behind the borrowing deserves careful attention from the outset.

Issues involving guarantees, lender security, refinancing, shareholder arrangements, and existing liabilities can all affect the long-term flexibility of the investment structure.

Dylan Leet, partner and head of real estate finance, says:

"We regularly see investors focus heavily on SDLT or tax efficiencies without fully considering refinancing restrictions, lender security, or shareholder arrangements. Those issues often only emerge later when portfolios grow, or ownership structures change."

Our solicitors advise investors, developers, landlords, and property companies on SPV borrowing, refinancing transactions, lender security, shareholder arrangements, and investment property structures.

Get in touch to discuss your proposed transaction with our real estate finance team.