When it comes to property development funding, securing loans through various legal documents is essential to protect both the lender and the borrower. The type and nature of the documents used can vary depending on the type of loan being provided. At ASAP Finance, we specialize in providing loans for property developments, which requires a bespoke set of documents over and above the traditional term loan agreement that we are all familiar with.
These documents will set out your rights and obligations during the term of the loan, so as a developer, it is critical to understand what each document is. Not only will it help you navigate through the funding process more efficiently, but it may guide and influence your decisions during the project that will help you better manage your relationship with your lender.
In this two part blog series, we’ll explore the key security documents used in our lending practices: the Letter of Offer, Term Loan Agreement, Deed of Guarantee, General Security Agreement, Specific Security Agreement, and the Pre-sale Undertaking from a solicitor. We’ll delve into what each document is, why lenders use it, its functions, and the risks involved.
1. Letter of Offer
A Letter of Offer (LOO) is a preliminary document from the lender to the borrower outlining the basic terms and conditions of the loan before formal security documents are drafted. This document is the first binding document issued by the lender in the funding process and will be issued after terms have been negotiated.
A letter of offer will provide a clear, concise summary of the loan terms, as well as outline conditions precedent (CPs) that need to be satisfied before the lender will settle the loan.
The letter of offer allows the borrower to understand the commitment they are entering into and ensures a mutual understanding of the loan terms before proceeding with the more detailed and legally binding security documents.
Always review the letter of offer in detail; otherwise, it could lead to misunderstandings or disputes later. Consider the following:
- Review all high-level terms including facility type, loan amounts, term of the loan, interest rate, fees (including when they become payable), the commencement date, and other relevant terms.
- Review other provisions such as your ability to redraw or repay the loan facility early without incurring early repayment fees.
- Review what securities you need to provide, and ensure you can provide all securities required (this includes ensuring you’re in a position to grant a 1st registered mortgage or 1st ranking GSA as is required by almost all lenders).
- Know your CPs inside and out and liaise with consultants and other professionals to ensure you can deliver on all the CPs prior to the settlement date. While ASAP Finance offers flexibility around certain CPs, most other lenders strictly enforce these requirements
Lastly, lenders’ application fees are commonly linked to the signing of the letter of offer – irrespective of whether you fulfill the pre-settlement conditions and settle on the settlement date. This means that if you fail to satisfy the pre-settlement CPs and cannot settle, the application fees will still be payable – even if the loan does not proceed.
This re-emphasizes the importance of carefully reviewing the pre-settlement CPs and ensuring these can be satisfied prior to the settlement date.
2. Term Loan Agreement (or Facility Agreement)
A Term Loan Agreement (TLA) is a comprehensive document that outlines the terms and conditions under which the loan is provided. It will include all the details included in the letter of offer as well as additional items such as warranties, covenants, events of default, and other conditions that the borrower must adhere to during the loan term.
Lenders use term loan agreements to establish clear expectations and obligations for both parties. It serves as a legal contract that ensures the borrower understands the terms of the loan and agrees to comply with them.
Think of it as a structured framework for the loan, detailing the financial obligations of the borrower and the legal rights of each party. It also includes provisions for what happens in the event of a default, ensuring the lender has recourse if the borrower fails to meet their obligations.
Things to consider:
- Ensure the terms and conditions within the Term Loan Agreement reflect those agreed in the Letter of Offer.
- Review your covenants and undertakings in detail. Remember, your lender will have provided you the loan based on the information and representations made to them. Any inaccuracies or misrepresentations (whether intentional or otherwise) will likely be an event of default.
- Your obligations will likely extend beyond those that are purely financial. For example, most loan documents for development loans have provisions that consider scenarios where the project falls behind schedule. It is your job as a developer to ensure that the integrity of the project remains intact.
- The loan document will almost certainly have cross-default provisions, meaning that if you default on another loan, you will also be in default on this loan. Run a steady operation and don’t take your eye off the ball if you are running multiple projects.
- On that note, you should understand all events of default in detail.
3. Deed of Guarantee
A Deed of Guarantee (sometimes called a Personal Guarantee or PG) is a legal document in which a third party (the guarantor) agrees to take responsibility for the borrower’s debt if the borrower defaults on the loan.
Lenders use deeds of guarantee to mitigate the risk of borrower default. By having a guarantor, lenders have an additional layer of security, knowing that someone else will cover the debt if the borrower fails to do so.
This document ensures that the lender can recover the loan amount even if the borrower is unable to repay it. It legally binds the guarantor to fulfill the debt obligations, providing financial security to the lender.
All development facilities will typically require the main sponsors of the project to personally guarantee the loan provided to the development entity (being a company or trust).
Things to consider:
- Be prepared to personally guarantee your project. The main sponsors will almost always be asked for PGs and will need to have skin in the game – lenders don’t look favorably towards developers who do not wish to grant PGs or who are solely reliant on investor funds.
- If the borrower defaults, the guarantor must repay the loan – in this sense, you should only guarantee a loan for a project that you have direct control over and that you can control the performance of.
That wraps up Part 1 of our two-part series. In our next blog, we will explore the General Security Agreement, Specific Security Agreement, and the solicitor Pre-sales Undertaking. Stay tuned for more!