Traditionally forestry purchases in Scotland have been cash purchases, rather than relying on bank funding. However as the strength of the market has attracted a new breed of commercial investor used to dealing with leveraged investment portfolios, commercial lenders' involvement has been increasing.

Commercial lenders have started to recognise that forestry presents a good opportunity for lending; the market has long-term stability and, by its nature, forestry presents a relatively low risk form of secured property. The current strength of the market plays a role - a greater number of investors and higher values means the banks are eager to tap into the market and provide funding opportunities which appeal to investors. There's also a growing trend to provide green or sustainable funding, and forestry can fit within that model. Bank funding is not only a consideration at the point of purchase; forestry can provide good security any time finance needs to be raised, perhaps in connection with infrastructure investment for the forest in question.

However the banks are relatively new to lending to this sector, so obtaining funding and granting the required security (fixed charge) over the forest may not be as streamlined as, for example, financing of a farm or commercial property. Some of the unique aspects of forestry purchases may not initially fit the relevant bank's mould.

For example, clawback agreements, where a previous owner retains an entitlement to share in an increase in value as a result of development, are common in the forestry sector. These are usually reinforced by a security granted over the forest in question in favour of the previous owner/clawback holder. The existence of an additional second security, whether already in place at the time of purchase or to be put in place as part of the agreed terms of the purchase, adds a layer of complication. The securities will need to operate together, and an agreement as to which takes priority (the bank will insist on having priority) will need to be implemented. However that is a relatively common scenario and the parties involved will likely have experience of such arrangements. A well drafted clawback agreement will always state that a security to a lender will take priority, and lenders will be familiar with such agreements.

Lending may also be complicated if the forest in question consists of more than forestry, for example a cottage or telecoms mast. The different elements to the security will need to be considered in arrangement of the loan and in the reporting by the solicitors involved.

Furthermore, some aspects of forestry may not fit the lender's standard requirements. For example, insurance arrangements for forestry are peculiar to that sector, whereas a lender's standard requirements in respect of insurance will likely be geared towards buildings (residential or commercial) and anticipate that the secured property is insured to full reinstatement value, which is not applicable to forestry.

More generally there are aspects of forestry which are relevant to the value of the forest, and therefore to the lender, but which may not be familiar to them or their legal advisors.

Ultimately these points shouldn't and don't overly complicate lending for forestry purchases or prevent funding from being secured. Discussion of these points will be wrapped up in the usual process of reviewing and reporting on the title to and value of the forest, which takes place with the lender and/or their advisors. In time it is expected that the processes lenders follow and their standard form documentation for forestry will develop and the need for discussions on the unique elements of forestry purchases will diminish.

A version of this blog also appears in Confor's Forestry & Timber News.

For any further advice or information on any of the points raised above, please get in touch with Graeme Leith or your usual Brodies contact.