Lender protection on construction projects—introductory guide

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Lender protection on construction projects—introductory guide
  • Taking security over the development/construction documents
  • Collateral warranties
  • Amendments to insurance policies
  • Appointment of a project monitor

Lender protection on construction projects—introductory guide

When providing finance for any development or construction project, the lender (or funder) and its advisers will use various methods to protect the lender’s position. The aim of these protections is to ensure, at the very least, that the lender is able to recover any finance it provides if the borrower (or developer) becomes insolvent or the project runs into difficulties.

One of the key documents in a development financing is the contract between the lender and the borrower ('the facility agreement'). This will include various detailed provisions relating to the development. For more information on the key construction issues to be dealt with in facility agreements, see Practice Note: Facility agreements—construction provisions.

Another important aspect of a development financing involves the lender’s lawyers reviewing the construction documents prepared by the borrower and its lawyers to ensure that they are properly drafted and provide appropriate rights for the borrower and any interested third parties if they need to commence an action against any of the construction or professional team.

In addition to ensuring that the documents are properly drafted, there are other specific measures which lenders typically insist upon as part of an agreement to provide finance including:

  1. taking security by way of an assignment or charge over the construction documents

  2. provision of collateral warranties in favour of the lender and

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