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Issues to Consider When Obtaining Construction Finance

The general concept of ‘real estate finance’ can cover loans to assist a borrower with the acquisition of a property (whether residential or commercial) or refinancing an existing loan secured against the borrower’s property, loans for the borrower’s business purposes that are secured against property that it owns and loans for the development or construction of property.

Legal Steps and Obligations for Borrowing Against an Existing Property

Borrowing against an existing property (that has already been built) will, in broad terms, follow standard(ish) legal steps with which many homeowners are familiar, to provide security to a lender. Generally, there will be some form of loan agreement that imposes on the borrower certain financial obligations (i.e. obligations to pay interest and repay the loan sum that was lent) and property obligations (to take steps to maintain the value of the property throughout the duration of the loan agreement, e.g. by requiring the borrower to keep the property in repair, to insure the property, not to cause or permit damage to be caused to the property etc.) and the borrower will be required to enter into documents to provide security in favour of the lender (usually a first legal charge/mortgage over the property and sometimes guarantees in favour of the lender). Development Finance can differ from these more familiar real estate finance methods and additional legal steps and documents may be required.

How Is Development Finance Different From a Standard Loan Secured Against Property?

‘Development finance’ or ‘construction finance’ involves a lender providing a loan to a borrower for it to develop (i.e. build, extend, renovate or refurbish) a property. It can form part of a loan that is made to also acquire the property that will be developed. The loan is secured against the property (as with other forms of real estate finance) but security will also be given over the developer’s (i.e. the borrower’s) rights under relevant construction documents – e.g. security over rights of the borrower/landowner under the contract with its building contractor to carry out the development and overs its rights under services agreements with other professionals such as the architects and engineers for the construction project – as well as security over the borrower’s rights to proceeds of insurance policies relating to the property and the construction project itself.

Comprehensive Due Diligence Requirements for Lenders In Property Development Projects

A prudent lender will usually insist on a full due diligence review not only of the property which is being provided as security, but also a full review of the planned development and all construction contracts and the contractors themselves before funding is released to the borrower. The lender will want to review:

• the value of the property itself, which will be lower while the construction project is being carried out compared to what its value will be when the development has been completed. On a development project that will involve the sale or lease of units on a development (e.g. building a block of apartments), a lender will want to have a clear picture of (and certain controls in respect of) agreements for leases or sales of units that are in place and will be put in place;
• the experience and skill of the project team (e.g. main building contractor and associated professionals – e.g. architects, structural engineers and other members of the design team) and what levels of professional indemnity insurance they have in place to cover any defects that may arise in their design (and in the case of the main contractor, whether they have sufficient cover to protect against the possible insolvency of any subcontractors or consultants);
• the costs to complete the design, build and sale of the development (which, together with funding costs, should not exceed the value of the completed development) – often a lender will require its own ‘monitoring surveyor’ or ‘quantity surveyor’ to review the budgets or, as a minimum, they will arrange for their own professionals to ‘sense-check’ the costings;
• what rights the lender will have if the borrower/developer is unable to complete the development, such that the lender must ‘step in’ and take over the construction project to get it completed.

Conditions Precedent for Standard Real Estate Loans

Lenders of ‘standard’ real estate loans (that do not involve construction elements) normally impose numerous conditions precedent (known as ‘CP’s) such as requiring satisfactory reviews of the property title documents, insurance, appropriate consents and authorisations and planning permissions etc. These CPs must be satisfied by the borrower before the lender will make any funds available to the borrower.

Conditions Precedent For Construction and Development Loans

The list of CPs for a construction loan/development loan will include all of these ‘usual’ conditions and impose numerous further construction specific conditions, such as requiring sight of signed building contracts, professional appointments, professional indemnity insurance documents and collateral warranties, as well as detailed budgets that have been approved by the lender’s representatives.

It may be that the construction loan will be released in separate tranches when certain phases of the development have been reached, and in that case it may be that there will be CPs that need to be satisfied at each stage of the development process, possibly to be signed off at each stage by the lender’s own monitoring surveyor (who would represent the lender, but whose fees must be paid by the borrower).

It is for these reasons that the various documents required for a development loan will be more detailed and complicated and accordingly they take more time to negotiate and finalise between the parties and their lawyers than would be the case for a loan that does not involve construction elements.

Summary

Development finance or construction finance facilities are complex, and the legal processes can take a long time, involving many legal advisors acting for the borrower, the lender and sometimes for the building contractors as well. At Quastels, we have experienced lawyers in our Finance & Banking, Real Estate and Construction departments who work together as a single team to progress matters for our clients (both borrowers and lenders) as swiftly as possible.

To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.

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‘I Have Been Outside the UK For More Than 450 Days. Can I Naturalise as a British Citizen?’

As a paralegal specialising in immigration law, I often face complex cases. In fact, I have recently had the privilege of assisting several clients with their naturalisation applications for British citizenship. These cases were particularly challenging due to extensive absences exceeding the 450-day limit over the 5-year qualifying period. Here’s how we successfully navigated the complexities of these applications. We offer tailored services and expert guidance in handling this type of application. Explore the details based on the most recent successful case I had, and let me know if we can assist in resolving a similar application for you.

Initial Assessment

I was approached to handle a naturalisation application involving 845 days of absence from the UK. The statutory requirement allows up to 450 days of absence over five years, with a maximum of 90 days in the final year. These excess absences were mainly due to work commitments, COVID-19 and lockdowns, and health issues. Understandably, the main concern is the likelihood of success.

Gathering Evidence and Exploring Unique Circumstances

Recognising the importance of a compelling case, we gathered comprehensive evidence, including:

• Employment Documentation: Employer records and letters confirming necessary international assignments and outlining the nature and duration of the projects and work.
• Covid-19 Impact: Documentation and evidence of disruptions caused by the pandemic and lockdowns.
• Personal Commitments: We requested medical records and family testimonies for absences due to health issues and family emergencies.
• Ties to the UK: To demonstrate the strong connection to the UK, we compiled evidence of property ownership, bank statements showing regular financial activity in the UK, and involvement in local community activities.

Crafting The Application

With the evidence in hand, we crafted a comprehensive application that highlighted several key points:

• Exceptional Circumstances: We argued that absences were due to exceptional and unavoidable professional and medical obligations.
• Economic Contribution: We emphasised the substantial contribution to the UK economy through the professional role, highlighting the importance of work and the revenue it generated for the UK-based employer.
• Commitment to the UK: We underscored the strong ties to the UK and intention to further reside permanently in the UK, and good character and commitment to the UK.

Mitigating Factors: We provided detailed explanations for each significant absence, supported by documentary evidence, to show that each was justified and, in many cases, unavoidable.

We submitted the application with a well-structured legal representation letter that outlined the arguments in detail, drawing attention to the Home Office’s discretion to grant naturalisation in cases where the applicant demonstrates exceptional circumstances and strong ties to the UK.

Outcome

After a three-month wait, well within the Home Office’s six-month timeframe, we received confirmation that the application was approved. The Home Office recognised the exceptional professional commitments and strong ties to the UK, which are clearly outlined in the application. The naturalisation ceremony was scheduled, and our client is now a proud British citizen.

Should you have an immigration enquiry, please reach out to the Immigration Department at Quastels by using the enquiry form below.

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Tourist Today, UK Taxpayer Tomorrow?

A UK Standard Visitor Visa typically permits individuals to stay in the UK for up to six months at a time, and it is often mistakenly assumed, that you will therefore not become UK tax resident as long as you do not exceed this period. This common error arises because many countries, such as the UAE, have straightforward day count thresholds for becoming a tax resident, leading individuals to incorrectly apply the same criteria to the UK.

However, this approach is unlikely to be sufficient for those who visit the UK frequently; commonly because they have acquired property in the UK and spend extended periods visiting, and/or have children who attend school in the UK.

Visitors should approach this exercise cautiously as the implications of becoming UK tax resident are potentially substantial, by inadvertently bringing non-UK source income and gains into the UK tax net.

Statutory Residence Test

The UK’s test for determining tax residence is set out in the Statutory Residence Test (SRT) which conclusively determines whether an individual is UK tax resident in any given tax year.

It is primarily based on physical presence in the UK and does not consider any test of habitual residence (generally, this is a test which determines the country in which an individual has established the centre of their personal and professional life, for legal purposes) or the intention of the individual, when determining whether they become UK tax resident.

The well-advised visitor may be aware that the number of days they may spend in the UK without becoming tax resident, can be affected by the number of connections they have to the UK. Under the SRT, these connections are known as ‘ties’ which are as follows:

• Family tie;
• Accommodation tie;
• Work tie;
• 90-day tie; and
• Country tie (this tie only applies to individuals who have been a UK resident in at least one of the previous three tax years).

Each of the ties has its own set of conditions or qualifying criteria attached to them. In essence, individuals with few or no ties are more freely able to spend time in the UK without triggering UK tax residence.

In contrast, individuals who for instance own UK property, perhaps spend time working in the UK, or who in previous tax years, spent 90 days or more in the UK, will have these ties which significantly decrease the threshold number of days they may spend, without becoming UK tax resident.

An Example

Ali is a non-UK national, employed as a consultant who often works remotely. Ali has a spouse and children who reside in the UK. He also jointly owns a property in the UK with his spouse, where his family resides in. Ali has also spent over 90 days in the UK in each of previous last three tax years. Ali has not been UK tax resident in previous years.

Ali therefore has the following ties:

• 90-Day Tie: Ali has spent more than 90 days in the UK in previous tax years.
• Accommodation Tie: Ali owns a property in the UK, which is available for his use.
• Family Tie: Ali’s immediate family (spouse and children) live in the UK.

With three ties, Ali could spend up to 90 days in the UK in the current tax year without triggering UK tax residency, according to the SRT.

If Ali were to acquire a fourth tie in the same tax year, i.e. the ‘work tie’ on account of having spent the requisite amount of time working in the UK, his days would be severely limited the following tax year, to 45 days, if he wished to remain non-UK resident.

The above example shows that monitoring your UK tax residence goes beyond simple day counting, and it is important for individuals to carefully observe time spent in the UK, particularly in circumstances where they may have ties.

To discuss any of the points raised in this article, please contact Ben Rosen or fill out the form below.

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