Satisfying Your Funder

Funders providing development finance will each attach different conditions to their lending. A common condition, however, is for the funder to require a legal route of recourse against the contractor and his sub contractors and the members of the professional team appointed to carry out development. This article highlights the steps you can take to increase the likelihood of your being able to satisfy this common condition. 

Collateral Warranties

The most straightforward way to satisfy your funder in this regard is to provide him with collateral warranties executed by your contractor, his sub contractors/sub consultants (or a limited class of them) and each of the members of your professional team (architect, quantity surveyor, engineers etc).

However, you cannot demand that your architect or contractor provide a collateral warranty unless you have the right to do so under your contract with them. Accordingly, when appointing your contractor and your professional team members you should:

1. Use a proper form of appointment and construction contract (see below);

2. Include provisions within these contracts that entitle you to request the provision of a collateral warranty in favour of a funder;

3. Specify the timeframe within which these warranties should be provided and consider including a right for you to withhold monies until such time as these warranties are provided;

4. Specify the form of the warranties that will be required. If you have a good idea of which funder you will approach, you could obtain a copy of their required form of warranty at the outset and include this in your contracts. If you are not clear as to which funder you will approach then you should specify a form of warranty that contains certain key provisions which most funders will require. These provisions include (but are not limited to):

• An obligation on the warranting party to use reasonable skill and care in carrying out its services/works and an obligation not to specify or use deleterious materials;
• A right to assign the warranty on at least two occasions without consent;
• A copyright license to use any materials produced in connection with the services/works;
• An obligation on the warranting party to continue to maintain professional indemnity insurance at an appropriate level for twelve years following practical completion;
• Rights for the funder to "step in" and take over the contract or appointment as the case may be. 

Proper Contracts

Collateral Warranties are generally only as good as the contracts to which they relate. It is therefore important that you appoint your contractors and consultants properly. The precise implications of this are beyond the scope of this article but the following are some essential points to consider in this regard:

a. Try to appoint your contractors and consultants by use of one written document rather than by several exchanges of correspondence. This way you know that all the terms and conditions governing your contractual relationship are contained in one document, you have clarity as to when your contractual relationship came into being, and you have a document that both parties to the contract have executed.

b. Try to ensure that the following issues are addressed in the contract in addition to those detailed above in paragraph 4 a. to d.:

• The obligation to provide a collateral warranty in a particular form within a certain number of days of being requested to do so in favour of a funder and in favour of a purchaser or tenant of the works;
• As your contracts will relate to construction operations it is highly likely that the Housing Grants Construction and Regeneration Act 1996 will apply to them and will imply certain conditions from the Scheme for Construction Contracts Regulations 1998 into your contracts if you fail to provide for them yourself. The two areas specifically affected are Payment and Dispute resolution, so be sure to address both these issues unless you are happy for the Scheme's provisions to apply;
• Make sure you have agreed and documented what rights you are to have regarding termination of contracts and what is to happen if termination occurs.

Assignment

If you find that you cannot obtain collateral warranties in favour of your funder, some funders may be satisfied by an assignment of the benefit of each of your contracts to them instead. In order for you to be able to do this you will need to have included a right of assignment within your contracts (ideally without the need for you to firstly obtain the consent of the other party to the contract). By assigning the benefit of your contracts to your funder you afford them the same rights as you had against your contractors and consultants. 

Conclusion

It is all too common for parties to rush into appointing their contractor and consultants without giving proper thought to the requirements of any external funder. This can cause later problems in securing the required funding and our advice would be to liaise with your funders as early as possible and to ensure that any such contracts are on market facing terms, bearing in mind the likely needs of your funder.

Alex Williams is a solicitor in the Michelmores Construction Team. For further information on any of the issues raised in this article, please contact Alex at alex.williams@michelmores.com or on 01392 688688.