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Break the Bank - what construction documentation is required by the banks?

The bank funding my development is taking a very tough line as regards documentation. It has put forward documentation that the contractor and consultants have said they will not sign on the basis that they take away all their contractual protection.  What can I do?

Answer

Banks have always insisted on the right to approve construction documents and commonly take a charge or security assignment over those documents, as well as insisting on a full package of collateral warranties. During the boom years, banks were often prepared to take a relaxed view, provided that the borrower had a satisfactory track record and that the project was seen, in broad terms, as viable. Those days are however now long gone: those responsible for development finance in banks, and their legal advisers, are now far more demanding as regards the contractual obligations imposed on developers - and on their contractors and consultants. This is hardly surprising, at a time when a major bank can report that over 40% of its property lending is in some way "flawed", but can cause real problems for developers, particularly where contractual wording which is totally unreasonable or simply incorrect is required.  

Your bank is taking security assignments of the building contract and consultant's appointments, a full package of collateral warranties, and requires all "property and construction insurance" to be in joint names. It is also requiring the contractor and consultants to sign acknowledgements that they have been given notice of assignment of the contractor appointment.

One of your consultants, probably prompted by its insurer, is insisting on a "net contribution clause" in its warranty, which the bank won't accept. This is a clause which ousts the normal principle that where a number of parties are liable for the same loss, the entirety of the loss can be recovered from any single party. There is no easy answer to this: most banks won't accept these clauses, whilst some insurers insist on them. It's very much a question of having to try to negotiate a compromise: for example, an overall cap on liability under the warranty may be acceptable to both parties.  However, and with the benefit of hindsight, this does underline the importance of making the bank's likely requirements clear to the contractor and consultants at the outset.

Your consultants have pointed out that professional indemnity insurance cannot, as indemnity insurance, be written in joint names, as the bank requires. This is correct, and the bank should be prepared to exclude professional indemnity insurance from the joint names requirement.

The acknowledgements of notice of assignment provide that the contractor or consultant will not terminate the contract or appointment or take any action to "amend or supplement" these without the bank's prior approval. The contractor and consultants view this as unacceptable: the need to obtain the bank's approval before terminating goes far beyond the step in rights contained in the warranty, which simply requires the bank to be notified in advance, and potentially makes it impossible to terminate, however serious the default. The ban on taking action to "amend or supplement" the agreements without the bank's consent potentially prevents the contractor or consultant from making claims or commencing proceedings for extra time or money without the bank's consent. These provisions are both completely unreasonable and the bank should be prepared to accept wording that both reflects the position under the warranty as regards termination and excludes all claims or proceedings.

This article first appeared in the March 2012 edition of Professional Housebuilder and Property Developer. Find out more about our Construction services.

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