In the complex world of property development finance, securing a loan involves various legal documents that protect both the lender and the borrower. In Part 1, we discussed the initial critical documents, and now we delve deeper into additional security documents that will typically accompany a property development loan.
4. General Security Agreement (GSA)
A General Security Agreement (GSA) grants the lender a security interest over the borrower’s current and future assets, providing comprehensive collateral for the loan. It is the second most critical security after the mortgage, and almost all lenders will require it when providing development finance.
Living up to its name, the GSA is general, securing a broad range of assets and can cover all present and after-acquired property, goods, intangibles, money, and more. GSAs reduce the lender’s risk, ensuring a claim over such assets in case of default.
Once signed, the GSA will give the lender the right to register their security interest on the Personal Property Securities Register (PPSR) and make a claim over the secured property in the event the borrower defaults on the loan. Like a mortgage, charges are registered in an order of priority (1st, 2nd, 3rd ranking, etc.). Most development lenders will require a first-ranking GSA over the borrower, so it is important to know if you have granted a GSA (or the ability to register a charge on the PPSR register) to another lender (or trade supplier, as is often the case).
The simplest way to ensure you can offer a 1st ranking GSA to your development finance partner is to have a clean entity or special purpose vehicle (SPV) set up to specifically undertake your project. If you have a group entity that has other debts, it can be very complicated carving out a 1st ranking charge over the development assets, which as discussed, most lenders will require.
5. Specific Security Agreement (SSA)
A Specific Security Agreement (SSA) provides the lender with a security interest in specific assets rather than a broad range. In development finance, this typically pertains to specific assets or contracts relating to a project such as sale and purchase agreements, pre-sale agreements, construction contracts, construction bonds, etc.
With a hope of not being too reductive, you can expect to see the following:
- Undertakings from the borrower, which (among other things) prevent the borrower from making changes to the material contract
- Assignment of all benefits of the underlying agreement to the lender, and
- The creation of special powers in favor of the lender (such as the ability to enforce its rights under the material contract when an event of default occurs).
Two of the most common SSAs are over pre-sales contracts and construction contracts.
SSA (Pre-Sales)
Securing pre-sales agreements extends beyond ensuring that the lender has a claim on the revenue from these sales. It can include things such as securing the deposits and also preventing the developer from amending or canceling any existing contracts. This ensures that the developer cannot change the risk profile of the transaction without the lender’s permission.
SSA (Construction Contract)
An SSA over a construction contract gives the lender a security interest in the contract’s proceeds and obligations. It ensures that the lender has rights to the project’s completion and any financial benefits arising from the construction contract. Delays or issues in the construction process can affect the value and enforceability of this security, posing risks to the lender.
It is important to remember that lenders make the credit decision based on the information represented to them by the borrower, which includes material contracts entered into by the borrower that are deemed necessary to complete the project. Thus, any changes to these contracts change the shape of the deal (risk), meaning that the lender will need to sign off on these changes.
6. Pre-Sale Undertaking from a Solicitor
A pre-sale undertaking from a solicitor is a legal commitment made by a solicitor to a lender, confirming that
- the pre-sales they have on file are unconditional (except for titles and CCC);
- they hold the deposits on trust;
- they will pay the deposit to the lender without set off or deduction when they are legally able to; and
- that they will use the sale proceed to repay the loan.
Lenders use pre-sale undertakings to ensure that quality of the presales as represented to them by the borrower is legally correct and true and to ensure that the funds from pre-sales (be it the initial deposit or net sale proceeds) are properly managed and allocated towards repayment of their loan. Note, the presale undertaking can cover not only existing, but also future presales.
For the borrower, there is little direct risk in this regard, but ensuring a reputable solicitor is chosen is crucial to avoid complications.
7. Deed of Assignment Over Intellectual Property
A Deed of Assignment over intellectual property (IP) assigns the rights of the borrower’s IP to the lender as security for the loan. In property development, this pertains to essential project documents such as resource consents (RC), engineering approvals (EPA), building consents (BC), and other plans and sign-offs you will have, as required to obtain code of compliance and individual freehold titles for your property development.
This ensures that in the event of default, the lender can claim these critical documents to complete the project or sell the project (as a complete package) to recover the outstanding loan amount.
The primary risk for the borrower is the potential loss of control over these essential documents. For the lender, managing these documents can be complex, but they are a crucial part of the credit approval process and underscore the developers ability to complete a project.
Conclusion
You will be relieved to know that lawyers have figured out how to simplify the loan documents, and the GSA, SSAs, and Deed of Assignment are now commonly bundled together into a single document that many refer to as a General Security Deed (or GSD), making it easier for all parties involved.
Understanding these security documents involved in property development lending is crucial for both lenders and borrowers. These documents ensure that loans are secured effectively, protecting the interests of all parties involved.
At ASAP, we prioritize transparent and secure lending practices, enabling our clients to focus on successful property development. If you have a project in need of a finance partner, contact ASAP Finance now!