Five Reasons a Financing Falls Apart at the Last Moment

A financing that collapses at the end almost never collapses because someone changed their mind about the transaction. It collapses because something that was assumed to be true turns out not to be, and it turns out not to be at the only point in the process where there is no room left to fix it. The asset is under contract, the deposit is committed, the completion date is fixed, and the discovery arrives with all of the leverage on the other side.

Five things account for most of these late failures: the title, the valuation, the security, the power to sign, and a change in the conditions of the offer. What they have in common is more instructive than what separates them. Every one of them was knowable earlier, all of them are verified late because that is when the process happens to test them, and each has a preventive step that costs almost nothing when taken at the beginning and cannot be taken at all at the end.

The title is not what the file says it is

Title problems surface late because title is examined late. The borrower’s lawyer looks at the property, the lender’s lawyer looks at it again, and the second examination is the one carried out with enforcement in mind. What emerges is rarely fraud. It is discrepancy: a registered description that does not match what was built, an extension or an outbuilding that never reached the register, a boundary that differs on the ground, a right of way nobody mentioned, a charge that was repaid but never formally discharged.

Any one of these can stop a financing outright, and the reason is specific to lending rather than to ownership. A buyer can accept an imperfect title and price the imperfection. A lender cannot, because its entire protection is the ability to enforce against a defined asset, and it will not lend against a description it cannot rely on. The borrower is then in the position of explaining to a seller, with the clock running, that a completion date agreed months earlier now depends on a registry correction in another country.

Leases produce the same problem in commercial assets. The lender’s lawyer reads the actual lease rather than the summary in the file, and finds a break option that was not mentioned, an indexation clause that works differently from the projection, a consent requirement that a change of ownership or a new charge would trigger, or a tenant obligation that has not in fact been complied with. The income the whole transaction rests on turns out to be less certain than the cash flow said it was, and the underwriting has to be revisited from the beginning.

The prevention is to run the title examination as the first act of the transaction rather than as a condition of the loan. A registry extract, the deeds, the licences, the leases and any existing charges, reviewed by someone reading them for enforceability, before the price is agreed and long before a lender is approached. Defects found at that point are ordinary problems with ordinary solutions. The same defects found at the end are a crisis, and they are the same defects.

The valuation comes in below what the transaction assumed

A valuation below the purchase price does not merely reduce the loan. It reduces it at the precise moment when the equity has already been committed elsewhere, because the loan is calculated against value rather than against price. The borrower discovers, late, that the amount available has fallen and that the difference has to come from their own resources, from a second source of debt or from a renegotiation with a seller who has no obligation to help.

Borrowers tend to treat this as an error by the valuer, and sometimes it is. More often it is a difference of question. The purchaser is valuing a specific opportunity, with a plan for the asset and a view of what it becomes. The valuer is recording what the asset is worth today, on the evidence of comparable transactions, to a general purchaser, with no credit for the buyer’s intentions. When the two figures diverge, the gap is usually the plan, and the plan is exactly what a lender will not finance at full value because the plan is the borrower’s risk.

There are legitimate responses. The report can be reviewed for factual error, incorrect surface areas, comparables that are not comparable, an assumption about tenure or condition that is wrong, and a demonstrable mistake will be corrected. Where the valuation is sound, the transaction can be restructured: a second tranche, security over another asset, a portfolio facility against liquid holdings if the borrower has them. What does not work is arguing about the value with a professional whose independence is precisely what the lender is paying for.

The prevention is to form a serious view of value before the price is committed, and to build the transaction on a conservative reading rather than an optimistic one. A structure that only works at the top of the range is a structure with no tolerance, and valuations are not precise instruments. Advance rates are quoted against value and the ceiling is up to 70 per cent depending on the transaction, so a transaction designed to require every point of that ceiling has already decided to be fragile.

The security cannot be given in the form the offer assumed

An offer describes the security the lender expects: a mortgage over the property, a pledge over the shares of the company that owns it, an assignment of rents, a guarantee from a parent. It is written on the basis of what the file said the structure was. Late in the process, the lawyers test whether those things can actually be granted, and the answer is not always yes.

The obstacles are structural and they are common in cross-border groups. An existing facility elsewhere in the group contains a negative pledge that prohibits new charges. Articles of association restrict the transfer or pledge of shares, or require a consent that will take time to obtain. A company cannot demonstrate corporate benefit in guaranteeing a debt that is not its own, which its own directors and their advisers will refuse to ignore. A pledge over the shares of a company in one jurisdiction, granted to a lender in another, requires formalities in both, and the sequence in which they are completed determines whether it is valid at all.

There is also the reverse discovery, in which the security is legally available but commercially unacceptable to the borrower once it is drafted. The guarantee turns out to be personal rather than corporate, or the charge extends to assets well beyond the transaction, or a cross-default clause ties an unrelated part of the group to this loan. The borrower who signed an indicative offer without reading its security section closely now has to refuse a term at the last moment, which reads to the lender as a change of position rather than as a clarification.

The prevention is to establish what the structure can grant before the offer is negotiated rather than after. That means reading the existing finance documents for restrictions, reading the constitutional documents of every company that will grant something, taking local advice in each jurisdiction involved, and deciding in advance which security the borrower is genuinely willing to give. A security package agreed on both sides at the beginning does not fail at the end. One assumed at the beginning fails whenever it is finally examined.

Nobody in the room can validly sign

The signing is the point at which a transaction meets a notary, and a notary is not a witness. In Spain and in the Netherlands the notary verifies that the person signing has authority to bind the company, that the chain of companies above it authorised the act, and that every foreign document proving those things is in acceptable form. This is the single most frequent cause of a financing failing on the day, and it is entirely administrative in origin.

The failures repeat with remarkable consistency. A power of attorney that is general where a specific one was needed, or that authorises the purchase but not the grant of a mortgage. An apostille missing, or attached to the wrong document, or issued by an authority the receiving country does not accept for that instrument. A translation that is accurate but not sworn, or sworn by a translator not recognised in the jurisdiction where it is being used. A corporate certificate older than the receiving institution is willing to accept. A director who resigned after the file was assembled and whose replacement appears nowhere in the documents on the table.

What makes this category worse than the others is the shape of the recovery. A signing stopped for a defective power cannot be repaired by anyone in the room, however willing they are. The document has to be reissued in another country, legalised again and returned, and the transaction waits for a courier and a foreign diary. Meanwhile the completion date passes, and with it the deposit, the exclusivity or the seller’s patience, none of which the notary has any power to preserve.

The prevention is a rehearsal. Every document that will be produced at the signing is sent to the notary in advance for review, in draft where necessary, with the specific acts to be authorised set out clearly. Notaries do this readily and it is their preference, because a stopped signing costs them an appointment too. The list of who signs, on behalf of which entity, under which instrument, and where that instrument was issued and legalised, should exist in writing well before anyone books a date.

The conditions change before the money moves

The last of the five is the one borrowers find hardest to accept, because it is the lender who moves. Between offer and drawdown the institution can reduce the amount, add a condition, require additional security, shorten the term or ask for a reserve. It happens when the underwriting produces something the indication had not anticipated, when the borrower’s own circumstances change, when a tenant gives notice or a financial statement lands, or when the institution’s appetite for the sector or the jurisdiction shifts while the file is in progress.

Some of this is unavoidable and legitimate. An offer is conditional, it says so, and a lender that discovers a materially different transaction from the one it indicated on is entitled to respond. What is avoidable is the surprise. Conditions imposed late are usually answers to questions the file never addressed: the adverse scenario nobody modelled, the lease expiry nobody flagged, the intragroup loan nobody explained. A file that raises its own difficulties and answers them is not penalised for candour. A file that leaves them to be discovered gets a condition attached to each one, at the worst moment for negotiating any of them.

The borrower’s exposure at that moment is a function of a decision taken much earlier: whether there is anywhere else to go. A borrower with one lender, a fixed completion date and no alternative accepts whatever is asked. A borrower who selected a small number of well matched institutions, kept a second in reserve and preserved the file’s ability to move has a genuine choice, and lenders behave differently towards a counterparty who has one. That reserve cannot be created at the end. It exists only if it was built before the first submission.

Read together, the five reasons are one reason. Nothing on this list is a late event. The title was already what it was, the asset was already worth what it was worth, the structure could always grant only what it could grant, the powers were always in the form they were in, and the weaknesses that attract late conditions were in the transaction from the start. What happens at the end is not the problem occurring. It is the problem being examined for the first time, by someone whose job is to examine it, at the only moment when nothing can be done. Every preventive step described here is available at the beginning, costs a fraction of what the failure costs, and has the same property: it moves the discovery to a point in the process where a discovery is still just information.

Montclare does not act as a lender. It structures transactions, prepares the file and coordinates financing with authorised institutions.