10,000 property firms targeted by banks in swaps mis-selling
19 Apr, 2013
Thousands of property businesses were targeted by banks mis-selling complex interest-rate “protection” agreements (commonly known as swaps), specialist law firm Berg says.
Banks were selling the swaps, which hedged against rising interest rates, to property-based companies on a regular basis because of rising property valuations prior to the financial crisis in 2008, according to Berg.
About a third of the claims in Berg’s caseload of more than 100 mis-sold interest rate swaps involve property firms. Based on this, the firm has estimated that nationally as many as 10,000 real estate businesses may have been mis-sold the swaps, with some experts estimating that overall up to 80,000 UK businesses may have been affected by the financial scandal.
It appears that banks routinely and aggressively targeted property businesses. Banks even brought real estate developments to businesses during the boom years, which had the effect of increasing their loan to value ratio. However, following the property crash, these firms did not have sufficient assets or capital to cover the huge fees imposed by the swaps, and with the fall in the value of properties, the loan to value ratio has been decimated.
The swaps were presented as ‘low risk’ products and hedged against the risk of rising interest rates. However, they then imposed massive charges when rates were lowered to 0.5% by the Bank of England in early 2009.
Among those property businesses affected by mis-sold swaps are Opal Property Group. The owner of the Manchester-based student accommodation provider has blamed an interest-rate swap for its collapse into administration, saddled with debts of more than £900million.
Alison Loveday (pictured), managing partner at Berg, said: “It has become clear to us as the interest-rate swaps scandal has unfolded that property businesses were very deliberately targeted by banks. Many saw them as ‘dead certs’ for easy fees from these products because property valuations were rising.
“However, the financial crisis changed all that. The interest rate swap products imposed huge exit fees or breakage penalties on the businesses that had bought the swaps, if they wanted to refinance. Many companies did not have ability to pay these exit fees, and so they are stuck with the swap. This is one of the reasons why we are now seeing so many real estate companies going to the wall.
“The guidance from us to property firms is to seek professional advice immediately. We will investigate if there is a case for an interest-rate swap being mis-sold by a bank which if pursued could result in a significant damages claim and assist in opening up a dialogue with the bank concerned.”
Berg has offices in Manchester and London.