Whatever the nature and size of a property development, financing invariably forms a critical element in making it viable and profitable says Robert Barnes, a partner in Thrings’ Development of Land team.
Development finance comes in all shapes and forms, and the market is awash with different options for developers, giving them the opportunity to explore rates and terms available from mainstream as well as alternative lenders.
One thing that remains consistent and certain is that the land, together with buildings in respect of partially or wholly built-out schemes, will be of paramount importance to the lender, who will ordinarily look to secure the value through use of a legal charge.
This guide provides eight examples of issues that developers seeking development finance should consider as part of their preliminary financing decisions to help ensure the legal process proceeds as smoothly and cost-effectively as possible.
1. Title
The title documents will need to be reviewed to verify absolute and unfettered ownership and any third-party interests will need to be accounted for. Applications to the Land Registry to update and rectify titles can cause delays. Early reviews to highlight such issues are therefore recommended, particularly if the title has not been subject to a recent acquisition due diligence review. Where either access or services require third-party land, a developer should ensure appropriate rights are in place to protect and preserve these. Developers can often help save delays and costs by asking their solicitor to produce a certificate of title in favour of the lender. This is particularly useful where a title review has been recently undertaken and there is any element of complexity.
2. Indemnity Insurance
Invariably a development involves a change of use. It is not uncommon for title issues to necessitate title indemnity insurance. Indemnity insurance may also be required to deal with other site-specific issues such as rights of light or environmental risks. Lenders need to ensure any such policies include them as an insured party and that the limit of indemnity is commensurate at least with the value of the loan. The policy should be reviewed and updated as necessary. It is advisable to seek approval of any indemnity insurance from a lender’s credit team as early as possible.
3. Party Walls
Where there is any possibility of the development works falling within the parameters of the Party Wall Act 1996, lenders will want to know there are no risks of a breach. With this creating risk of delay, specialist advice should be sought so that any requisite awards can be documented and presented to a lender.
4. Rights of Light
A developer’s site appraisal will invariably include a consideration of the surrounding properties and whether the proposed works present any risk of interference with third-party rights of light. As with party walls, a lender will want assurance that there are no such issues and that any potential issues have been addressed. Where there is any doubt, a specialist right of light survey should be commissioned. Indemnity insurance may be an option where risks are identified.
5. Planning
A lender will want to fully understand the planning position and verify:
- what conditions are included with the consent and which conditions have been satisfied;
- what planning agreements there are / are envisaged and what obligations remain to be performed (particularly in respect of financial payments such as CIL); and
- all appropriate building regulation approvals, listed building consents and conservation area consents have been obtained.
The preparation of a full and complete planning document including copies of key documents and a tracker illustrating the status of discharge of conditions helps ensure immediate clarity for the lender, their solicitors and their valuer.
6. Construction
Depending on the nature of the development and the terms of the loan, a lender may require the benefit of construction documents. Examples include collateral warranties from the professional team. In this case, a developer needs to ensure the terms of their appointments specifically provide for warranties to be produced (or potentially appropriate third-party rights instead). Lenders will also want to see underlying terms of appointment and evidence of appropriate professional indemnity cover. Developers should ensure they have absolute clarity around a lender’s expectations and engage with their professional team as early as possible. Ideally terms of appointment should be drafted to pre-empt and facilitate lender requirements.
7. Drawings, Surveys and Reports
Lenders providing development finance may well look to get rights to rely on and use any drawings, surveys or reports considered integral to the carrying out of the development. This may include drawings and reports specifically mentioned in the planning consent as well as important reports around issues such as environmental risk, asbestos and flooding. As with construction documents, the terms of appointment of the consultants will be key. The need for additional copyright licences or reliance letters can create delays and an early understanding of a lender’s requirements and requisite engagement with consultants is encouraged.
8. Insurance
Lenders will want to know the development has suitable insurance in place and that the terms offer them adequate protection. The nature of the insurance will depend on the specific development, but obvious examples are buildings insurance in respect of completed schemes and contractor insurance where construction work is ongoing. Developers should seek confirmation of the lender’s standard requirements and liaise with their insurers as early as possible to ensure policy terms can be updated as required. Many lenders wish to be co-insured and noted as first loss payee and they will also wish to ensure the limit of indemnity is commensurate at least with the value of the loan.
Summary
Every development is different, and every lender will have slightly different requirements. For these reasons, development finance is never a ‘one-size-fits-all’ process, and delays and complications can still occur. Our top tips are therefore:
- Engage with and seek to fully understand your lender’s requirements as early as possible;
- Raise and discuss any known issues or complications as early as possible;
- Liaise with your solicitors to discuss the preparation of a property pack, including all documents requested by, or likely to be requested by, the lender’s solicitors;
- Consider whether there are any savings to be made by providing the lender with a certificate of title; and
- Create an open dialogue throughout with the lender, their valuer and any monitoring surveyor.
To discuss anything covered in this article, or for more information about development finance, please contact Robert Barnes or another member of Thrings’ Development of Land team.
