Parallel loan agreements in PFI/PF2 projects

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

  • Parallel loan agreements in PFI/PF2 projects
  • Background to parallel loan agreements
  • What is a parallel loan agreement?
  • Anatomy of a parallel loan agreement
  • The future of parallel loan agreements

Parallel loan agreements in PFI/PF2 projects

This Practice Note looks at parallel loan agreements in PFI and PF2 projects. It considers the background to such agreements (arising out of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996)) and at the purpose and contents of the parallel loan agreement itself.

Note that in the 2018 Budget (delivered on 29 October 2018), it was announced that the government will no longer use PFI or PF2 on new projects (see News Analysis: Budget 2018—what does it mean for infrastructure and housebuilding?). Existing PFI and PF2 projects will continue to run.

Background to parallel loan agreements

To understand what a parallel loan agreement is requires an understanding of the legislative background that gave rise to them.

The HGCRA 1996 extends to all 'construction contracts', as defined by the HGCRA and provides a statutory regime which must be adhered to by the parties to a construction contract in relation to payment and adjudication (see Practice Note: Introduction to the HGCRA 1996). Section 113 of the HGCRA 1996 prohibited 'pay when paid' clauses. 'Pay when paid' means that the entitlement to be paid is dependent upon payment by a third party. Having a conditional payment regime would fall foul of the requirement for a construction contract to have an 'adequate mechanism for determining what payments become due under the contract'. See Practice Notes:

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