British Linen was/is the name of a very old established bank. Through mergers and acquisitions it became the ‘Merchant Bank’ of The Bank of Scotland, then became part of HBoS so was then swallowed up by the Lloyds Banking Group – who therefore currently own it and are responsible for it.
British Linen (BL) did a lot of their property lending in the 1990’s through ‘finance leases’ – along the lines of ‘sale and leaseback’ deals. Basically this is where they lent to you to buy (or build) a property but you then leased it to them and they in turn leased it back to you. In this way the borrower retained the freehold but BL had a Head Lease with a Sub-Lease to the borrower – who regained full, unfettered ownership when the loan was repaid. Such deals were often used by UK Universities to fund student accomodation blocks. They were used by banks as there were tax benefits to them (they generated Corporation Tax Relief)
The issues with some British Linen cases arise from:
- The complexity of the documents – the above structure would typically be covered by one ‘legalese written’ document (not user friendly).
- The fact that the documents were ‘vague’ when it came to how a redemption figure would be calculated in the event of a loan being repaid early – this is despite the fact that the lease is clearly a ‘finance lease’ (as opposed to a pure ‘property lease’) and you would therefore expect the potential for early redemption to arise and then to be provided for.
- The financial structure of the deals were exceptionally complicated – including features such as interest rate forecasts, capital allowance and corporation tax relief assumptions, fixed rates for part of the term followed by quarterly retrospective calcuations to LIBOR and more!
Most of the loans issued in the 1990’s will be repaid now – the remainder will be repaid in the next 5 years. BL has been closed for business for some time so we are now seeing the residual of a declining loan book. Borrowers looking to repay some of these loans are likely to encounter problems in contact with the bank.
My tips:
- If you are an organisation that has one of these deals still on the books – do check the calculations behind the quarterly rental premiums. They may well just go into the finance dept to be tallied to the direct debit when it comes. You are therefore assuming that the calculation linked to a retrospective LIBOR rate is accurate. There is just a chance that it may not be and I have seen expensive errors (which the bank quickly accepted and corrected)
- If you are redeeming one of these cases you should check and understand the basis of the redemption figure. If you are repaying it because the property is being sold then do not leave it to your solicitor to just call for and accept the redemption figure – they will not know how to check the figure is correct.
- If you are redeeming the lease because it is advantageous for cash flow (or a University and it improves the situation re the HEFCE funding matrix) – consider a careful negotiation with the new owners of British Linen (for example I have been able to save one client £365k on the net book value originally quoted)
Hope that is helpful to someone out there! Call if I can help