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.
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.
‘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.
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:
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.
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.
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.
The Building Safety Act 2022 has already brought in substantial regulatory reform with regard to building and fire safety, and continues to alter the property development landscape as sections of the Act are progressively brought into force – frequently with little or no warning.
This article focuses on provisions of the Act relating to New Home Warranties which have yet to actually come into force. These will apply to all newly constructed dwellings, and will make build warranties on these mandatory, and extend these to a minimum of 15 years. These changes will have a substantial impact on developers, housebuilders and insurers alike.
Whilst common in practice and generally a prerequisite to obtaining mortgage finance, new home warranties have not previously been mandated by law. Where provided, these are typically provided for a 10 year period – of which 2 years will be covered by the developer or housebuilder, and the remaining 8 by the policy provider.
Under section 144 of the BSA, any person carrying out a development in England which results in the creation of one or more dwellings will now be obligated to provide a new build warranty to anyone acquiring an interest in the dwelling, for a minimum term of 15 years from the date on which the relevant interest is granted. The extended term reflects the 15-year limitation period envisaged elsewhere in the BSA.
This applies in connection with any building work done that creates a new home, and not just the construction of a new building. So for instance, the conversion of commercial space to residential space would be caught under the regulations.
Once in force, the provisions will apply to any new dwelling sold or transferred from that point onwards. They will not apply retrospectively, meaning that warranties granted before that date will not need to be extended.
A new build warranty is defined under section 144 as an arrangement by which:
The Act also grants the Secretary of State powers to impose minimum requirements for such warranties by regulation. These are likely to include requirements as to the solvency of any insurer or underwriter, the assignability of the warranty, what defects must be specified, what levels of cover must be provided and even maximum amounts for any excess – but these details have yet to be confirmed. Whether the developer’s specified period of liability will be extended also remains to be seen.
Once in force, it will be unlawful for developers of a new build home to sell it without providing a 15 year warranty, failing which penalties will apply. The Secretary of State will set out the exact level of financial penalties that could be levied.
At present, section 145 provides that the maximum level of any penalty set will not exceed £10,000 or 10% of the sale price (whichever is the greater). The legislation also states that developers who have a “reasonable excuse” for failing to take out the warranty may not have to pay a fine. What constitutes a “reasonable excuse” has not yet been defined.
Interestingly, the standard of proof to which developers will be held in evidencing that they have a “reasonable excuse” will be the criminal standard – they will have to demonstrate this beyond reasonable doubt.
The government has stated that it intends to consult widely on the proposed minimum standards, and that it intends to delay commencement of section 144 to allow industry the opportunity to consider the outcome of that consultation. The relevant consultation has yet to be published, and no clear announcement has been made as to when such legislation will be triggered. Whilst Government originally published guidance on new build warranties, this was withdrawn in July 2022, and no further guidance has been published since.
That being said, these changes are inevitably on the horizon, and developers and housebuilders must start to prepare.
Property developers should begin engaging with their warranty providers now, particularly if any agreements with them are being renewed, and they should also budget any consequent increase in insurance premiums into their development costs. Given the length of time the policy must cover, an A-rated insurer will be required to back any such warranties.
To discuss any of the points raised in this article, please contact Stephanie Houston or fill in the form below.
As most of you will know, in August 2023 the Government laid before Parliament several regulations designed to extensively update and change various sections of the Building Safety Act (BSA) 2022 as well as other building regulations.
These changes came into force over the weekend. We have all heard plenty about the intentions behind the new regulations in wake of the Grenfell tragedy and Dame Hackitt’s subsequent report, but what does this mean for you and your business in practice? This article provides a brief overview of the changes.
The new regulations are:
Alongside the tabling of the new regulations, the Government also published its response to the consultation on changes to the building control regime under the Building Safety Act 2022 (BSA 2022) and relevant regulations.
These changes focused on HRBs and with the Government emphasising that it intended to place additional requirements on all those working on such buildings.
Part 2A of the Building Regulations etc. (Amendment) (England) Regulations 2023 introduces new dutyholder and competence requirements for practitioners and clients. These apply to all works that are subject to the Building Regulations 2010. Clients are required to plan, manage, and monitor the project to ensure full compliance with the Building Regulations 2010. Designers and contractors should only be appointed once the client is fully satisfied that they meet the competency requirements.
For their part, designers and contractors , having considered the project, must be sure that they can satisfy the competency requirements before they accept the job. Principal designers and principal contractors who have an active co-ordinating role must meet additional requirements before being appointed or accepting an appointment.
To meet the competency requirements, an individual contractor or designer must have the skills, knowledge, experience, and behaviours necessary to fulfil their duties. Entities must have the organisational capability to undertake the project.
Although most of these requirements will have already been fulfilled by the parties, the amendments require the steps be documented so a detailed audit trail exists.
The changes around HRBs set out in the Building (Higher-Risk Buildings Procedures) (England) Regulations 2023 are in line with those featured in the consultation on which the Government has recently published its responses. They include:
Broadly speaking, the amendments to the Building Regulations 2010 and the Approved Inspectors Regulations 2010 will not apply to building work started or where an initial notice has been given to a local authority and was accepted or treated as accepted before 1 October 2023.
There are complex transitional provisions in relation to the Higher-Risk Buildings Procedures Regulations 2023 which are beyond the scope of this article. If you have any questions, please feel free to contact me.
Many of the questions relating to the changes to the building safety regime will only become apparent as the new provisions bed in.
However, we do expect Regulators and the Courts to take a hard line on any breaches, so it is vital that your business fully grasps the changes and implements policies and procedures to ensure compliance.
To discuss any of the points raised in this article, please contact Stephanie Houston or fill in the form below.
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