We recently outlined the importance of holding an initial meeting on a residential development transaction. It assists the parties to identify potential issues which may arise during the course of the transaction, and the solutions that may be available to resolve such issues, so as to avoid unnecessary delays. We will now move forward to phase two of a transaction – the drafting and negotiation phase – in which we will explore the process of agreeing the form/terms of the security and construction documentation.
The Building Agreement
Form of Building Agreement
The form of building agreement should be agreed between the contractor and the developer and it should then be approved by the funder. Most developers will be familiar with the standard form RIAI construction contracts which, depending on the size of the development, are most commonly used. Although the obligations of both the developer (the employer) and contractor will come as second nature to most involved in construction, there are a number of common amendments required to these standard contracts to ensure that a funder’s requirements can be satisfied. For example, clause 15 of the standard RIAI blue form construction contract provides that written consent of either party is required prior to any assignment of the contract. A funder will usually (as part of its security requirements) require the ability to freely assign such a contract and therefore clause 15 is often amended.
There are a number of other forms of construction contracts in use, such as the JCT and NEC (usually used in the UK) or FIDIC (where consultants are working internationally), however these are less commonly used in Ireland on residential projects. Bespoke building contracts can also be used in Ireland, although again, are less commonly used.
If there is no building agreement
We have advised on a number of transactions where there is no main construction contract as the borrower and developer are the same entity. From a funder’s perspective, it will still require some form of protection in respect of the construction of the development – to ensure it is completed – and therefore may require a standalone collateral warranty directly from the borrower/developer (in addition to its security requirements). The borrower (as the main contractor) may also be the Project Supervisor for the Construction Stage (PSCS) and the duty to comply with this role should be included in the collateral warranty, or alternatively a separate standalone agreement should be entered into.
Appointing the Construction Team
The appointment of a borrower/developer’s professional team usually involves the appointment of a design team – an architect and the engineers (civil and structural/mechanical and electrical). It also usually involves the appointment of the contract administration team - a quantity surveyor and a project manager. Members of the construction team may appoint sub-contractors to assist them on the project. Other specialist consultants may also be appointed including e.g. fire safety consultants, disability access consultants etc., depending on the size and nature of the development.
Statutory appointments are required to be made including the design certifier and assigned certifier, as required by the Building Control (Amendment) Regulations 2014; and, a Project Supervisor for the Design Process and PSCS, as required by the Safety, Health and Welfare at Work (Construction) Regulations 2013.
Most funders will have their own form of appointment agreements. Appointments will usually contain a number of representations and warranties to the developer as to the execution, delivery and performance of the services by, and obligations of, the consultant under the particular appointment. Insurance requirements and dispute resolution provisions would similarly form part of an appointment. The value of the appointment agreement should also be detailed.
Development Finance Security Documentation
Funders will require that a building agreement is assigned and may also require that the consultant or material sub-contractor appointment agreements are assigned in their favour by way of security assignment. On the occurrence of an enforcement event, this entitles a funder to assume the contractual rights and obligations of the developer. The funder can then opt to continue a project without interruption with the contractor, the professional team and/or material contractors, subject to notice and acknowledgment formalities being adhered to (meaning the serving of notice of the assignment on the member of the professional team and the acknowledgement by them of the notice).
In addition to the protection afforded by security assignments, collateral warranties are sought by a funder in order to create privity of contract between it and a member of the construction team, entitling the funder to actually step in to the shoes of the developer in an enforcement scenario and take legal action against the relevant contractor, consultant and or sub-contractor if there has been a breach of the building/appointment agreement or collateral warranty.
Collateral warranties are usually taken from the contractor and all consultants, but not necessarily from all sub-contractors if they do not have any design input. Having said that, if the value of a sub-contract is high, a collateral warranty may still be taken even if a sub-contractor has no design input so that the funder could pursue the sub-contractor directly in the event of a defect. In gauging the materiality of a sub-contractor, we have seen funders look to the underlying monetary value of the contract.
Funders will often have their own form of collateral warranties. Some key provisions in a collateral warranty are as follows:-
- the extension of representations and warranties contained in an appointment agreement to a funder;
- the granting of step-in rights to a funder to enable the underlying contract to continue as between the funder and construction professional in circumstances where the employer (main contractor/ borrower) is unable to continue to do so. A notice period will often be set out as part of the step-in process which can range from 7 – 20 days;
- Assignability – a funder will usually be free to assign its rights and obligations under a warranty, although it may be limited to doing so once or twice only; assignment by a borrower/consultant/contractor will often only be permitted with the consent of the funder;
- Copyright – the granting of an irrevocable and royalty-free copyright licence to the intellectual property relating to the development;
- Insurances – the collateral warranty should set out how long the insurance policy must be maintained for and at what level this insurance policy should be. This is discussed further below.
Funders at this time may also wish to consider including some further protections in connection with potential Covid-19 site closures, as we cannot tell at this time whether this will reoccur. As funders would step into the shoes of the developer in that scenario, they will want to ensure the developer isn’t faced with increased costs as a result of the construction team being unable to progress development.
In addition, a collateral warranty may also be required by the ultimate purchaser of a development in circumstances where, for example, the development is pre-sold as a PRS Scheme or to an Approved Housing Body (AHB). It is worthwhile noting that in the case of an AHB, it will likely be funded by its local authority (up to 30%) via the Capital Advance Leasing Facility (CALF) Scheme with the balance funded by a commercial bank/Housing Finance Agency (HFA). The funder will require protection until such time as its debt has been repaid and the secured obligations/liabilities have been discharged. The ultimate purchaser will require protections for any defects arising post-practical completion. In these circumstances, it is often the case that some form of interaction between the funder and purchaser will be required, especially if that third-party purchaser is a semi-state body or an AHB.
The level of insurances (professional indemnity, employers’ liability, public liability etc.) required will most often be stipulated by the funder and in turn agreed with the developer. The requirement to maintain such insurances is usually tied to the limitation period stipulated in the appointment, which would usually be 12 years but we have seen it be negotiated down in certain circumstances. The maintenance of insurances should generally, in our view, apply for the duration of the loan, irrespective of the duration of the limitation period. Furthermore, stipulations that, for example, such insurances are maintained only if they remain available at “commercially reasonable rates” should be avoided. Although generally considered acceptable, not including any such dilution of the insurance requirements, will afford the best protection for the employer/ funder.
Providing the details of the construction team to a funder at the outset of a transaction so that the form of construction documentation required can be produced as soon as possible can avoid delays. It should be circulated to the construction team as early as possible to avoid any protracted negotiations. Similarly, providing a construction document in any other form than the funder’s approved form can also lead to delays as such a document would also have to be reviewed by the funder’s lawyers and ultimately may not be accepted by the funder.
- Residential Development Finance: Avoiding Unnecessary Delays
- Residential Development Finance: The Initial Meeting
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About the Authors
Michael is Head of the Banking and Financial Services team at Hayes solicitors. He advises on a broad range of domestic and cross border finance transactions. His primary focus is acting for lending institutions and borrowers on leveraged/acquisition, commercial property, construction/development and SME finance transactions.
Danny is a Solicitor on the Banking and Financial Services team at Hayes Solicitors. Danny acts for a variety of domestic and international SME’s and corporates, lending institutions, state bodies and Fintechs in a range of secured banking transactions including Acquisition Finance and has a special focus on Commercial Real Estate Finance - both investment and construction.
Catherine Jane O'Rourke
Catherine advises both employers and employees, in relation to contentious and non-contentious employment matters, including contracts of employment, workplace policies, workplace investigations, statutory compliance, redundancies and dismissals.
Catherine also has a background in transactional banking, including acquisition finance, property investment finance and development/construction finance. She has significant experience in both domestic and cross-border SME secured lending with a particular focus on multi-jurisdictional transactions.