Pursuant to an agreement for lease, a landlord is constructing a building for the tenant and has provided collateral warranties to it from the professional team. The landlord is now intending to mortgage the freehold simultaneously with completion of the lease at practical completion. Does the landlord need to procure new collateral warranties in favour of the bank as presumably the tenant wouldn’t permit assignment of those in its favour? Also, there is a novation agreement attached to the consultant’s letter of appointment (allowing for novation to the contractor)—how will this sit with the lender?

Pursuant to an agreement for lease, a landlord is constructing a building for the tenant and has provided collateral warranties to it from the professional team. The landlord is now intending to mortgage the freehold simultaneously with completion of the lease at practical completion. Does the landlord need to procure new collateral warranties in favour of the bank as presumably the tenant wouldn’t permit assignment of those in its favour? Also, there is a novation agreement attached to the consultant’s letter of appointment (allowing for novation to the contractor)—how will this sit with the lender?

This Q&A considers the likely approach that a lender will take in respect of collateral warranties and novation, in the context of a landlord constructing a building to be leased to a tenant, where the landlord wishes to obtain a mortgage over the freehold.

As a result of the doctrine of privity of contract, collateral warranties are often necessary in construction projects in order to protect third parties with an interest in that project. Privity essentially means that a person may not enforce the terms of a contract unless that person is also a party to that contract.

Banks will often insist on a full package of collateral warranties when entering into a lending agreement in respect of construction projects. Where a bank is financing a project for the first time, they will