Tag: security documents

Understanding Security Documents in Property Development Lending (Part 2)

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!

Understanding Security Documents in Property Development Lending

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).