Construction related finance and loan agreements

Construction project financing presents unique challenges and opportunities that distinguish it from other financing arrangements and interrelated documents that must work in tandem. The core documents typically include :-

• Facility Agreement - The cornerstone document containing construction-specific provisions including detailed conditions precedent for initial and subsequent drawdowns, construction-specific representations and warranties, tailored covenants addressing planning compliance and construction progress, project-specific events of default with appropriate cure rights and carefully structured repayment mechanisms tied to sales or refinancing.

• Security Package - Security is generally more extensive than for other forms of property financing, typically comprising a legal charge over the development site with specific provisions for partially completed works, a debenture over the borrower/SPV capturing construction contracts and planning permissions, specific security over construction materials both on and off-site, direct agreements with contractors and key professional team members, collateral warranties from the professional team and main contractor, performance bonds and parent company guarantees from contractors.

• Project Documents - the building contract, professional team appointments for architects, engineers and consultants, statutory a such as planning permission, section 106 agreements, building regulations approval, and utility/infrastructure agreements.

• Drawdown documentation - standardised certificates from architects and quantity surveyors confirming work quality, valuations, and compliance with specifications.

Specific issues with construction and development finance

For understandable reasons, lenders will want additional rights to monitor and potentially "step in" with property projects. Terms which are likely to be demanded by lenders include (but are not limited to) :-

• Phased drawdown mechanisms - structured release of funds tied to certified completion of defined construction phases, often requiring quantity surveyor verification and photographic evidence, conditions precedent for each drawdown stage such as architect certificates, statutory compliance evidence.

• Cost overrun protection - mechanisms including cash reserves, contingency facilities.

• Retention mechanisms - withholding of a percentage (typically 3-5%) of each payment to secure performance and remedy of defects, with staged release tied to practical completion and defects liability period expiration

• Rights of site access and inspection - rights for lender representatives to conduct site visits with appropriate notice periods, safety requirements, and documentation access rights during normal working hours

Our experience

The integrated nature of these documents requires specialised legal expertise to ensure alignment between technical construction documentation and financing terms. Our leading construction lawyer, Daniel Hutchings, has experience in drafting and advising on all the documents needed for construction and property development projects. His experience includes :-

• Development finance and loan facilities

• Forward funding arrangements

• Real estate investment structures

• Joint venture development financing

• Mezzanine and subordinated debt structures