The importance of lenders actively monitoring their deals and liaising with all parties involved when funding a development has been highlighted in recent case law. Issues have arisen that have resulted in the damages due from project monitors (PMs) being reduced because of contributory negligence on the lender’s part.
Remembering the basics and ensuring internal and external communication occurs is essential to the success of bank-financed projects in the recovering UK property sector. Whilst the case law has been very fact specific and does not create any new test or law to follow, we have used it to highlight a number of key points which any bank should bear in mind when working with PMs.
The Court has placed importance on the parties’ ability to communicate and share information properly; in particular the need to provide the PM with a copy of the facility letter and full details of the terms.
- Proactive reporting & evaluation
Although it is likely to be a requirement of the PM’s retainer to provide reports on the site and development, the bank should proactively liaise with the PM regarding outstanding or delayed information fundamental to the development.
- Knowledge & experience
The financing of building projects and property development is inevitably a very wide area which can cover numerous sectors. It is therefore of paramount interest to the bank that the key individuals working for it on such loan facilities have experience and expertise in the relevant field, for example, having experience working with building contracts. Errors in PM reports that would be spotted by more experienced staff can be missed by the inexperienced.
- Make no assumption
One of the key issues that has emerged is the extent to which the bank can rely on advice given by the PM and how assumptions by both parties can lead to losses.
In one case, the PM assumed that any shortfall in funding had already been dealt with by the bank, and that they did not need to comment on this in their reports. They also assumed that the bank was aware of the full scope of the development, with the bank then making assumptions itself regarding the accuracy of the reports, despite them containing information that conflicted with its own understanding of the development.
- Compliance with internal checks and processes
It is important to remember that a bank cannot take a “tick box approach”, as one Judge put it, and rely on a third party to entirely monitor costs, or indeed the source of them.
A strong framework set in place by a bank should ensure loans are only granted on basis of a development having a strong prospect of success, and for security holding enough value to ensure full recovery of the funds on enforcement.
Whilst conditions required to satisfy lending requirements have inevitably become more stringent over recent years, it can be said that the main point to take away is that communication is key for any development, not just at the outset but throughout the term of the funding.
While some of the above may seem obvious in retrospect, all of these points have arisen as issues in case law.
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