Breach of Covenant on Development Loans: Common Triggers and Remedies

Covenants are binding conditions that the borrower must comply with throughout the term of a development finance facility. They serve as early warning mechanisms for the lender, designed to identify problems before they become critical. While the loan itself may not be in arrears, a breach of covenant constitutes a default event under the facility agreement and gives the lender the right to take remedial action — including, ultimately, enforcement of its security.

Development finance facilities typically contain two categories of covenants: financial covenants and non-financial (or operational) covenants. Financial covenants set quantitative thresholds that the borrower must maintain — for example, the loan-to-value ratio must not exceed seventy percent, or the projected profit margin must not fall below fifteen percent of GDV. Non-financial covenants impose behavioural requirements — for example, the borrower must maintain insurance, comply with planning permissions, provide regular progress reports, and not change the scope of works without lender consent.

The practical impact of covenant breaches depends on the nature of the covenant and the severity of the breach. Some breaches are technical and easily remedied — for example, a late progress report can usually be resolved by submitting the report promptly. Other breaches are fundamental and difficult to remedy — for example, a significant LTV covenant breach caused by a market downturn. Understanding the covenants in your facility agreement, monitoring your compliance, and acting quickly when a breach is threatened or has occurred are essential skills for any developer managing a financed project.

The most common financial covenants in development loans are loan-to-value (LTV), loan-to-cost (LTC), and loan-to-gross development value (LTGDV). An LTV covenant requires the outstanding loan balance not to exceed a specified percentage of the current value of the development. An LTC covenant limits the loan as a proportion of total project costs. An LTGDV covenant caps the loan relative to the projected value of the completed development. A typical facility might contain all three covenants, each set at different thresholds.

LTV covenant breaches are most commonly triggered by falls in property values. If the market softens or the monitoring surveyor revalues the development at a lower figure than originally assumed, the LTV ratio increases even though the loan balance has not changed. For example, a £2,000,000 loan against a property valued at £3,000,000 represents sixty-seven percent LTV. If the property value drops to £2,700,000, the LTV increases to seventy-four percent — which may breach a seventy percent LTV covenant. We cover this topic in detail in our guide on LTV covenant breaches.

LTC covenant breaches are typically triggered by cost overruns. If the total project cost increases because of construction cost escalation, the LTC ratio changes even if the loan amount is unchanged. A £3,000,000 loan on a project with total costs of £4,500,000 represents sixty-seven percent LTC. If costs increase to £4,800,000 due to overruns, the LTC drops to sixty-three percent — which seems favourable but actually reflects the developer having to inject more equity, which may not be available. Conversely, if the lender has advanced additional funds, the ratio will worsen.

LTGDV covenant breaches can occur from either direction — an increase in the loan balance (due to additional drawdowns or capitalised interest) or a decrease in the projected GDV (due to market softening or a revised appraisal). The monitoring surveyor's regular assessments of GDV are the primary mechanism through which LTGDV covenants are tested, and a downward revision to GDV can trigger a breach even if the development is progressing well on site. Developers should monitor comparable sales evidence throughout the build programme and challenge any GDV assessment that they believe is unduly conservative.

Non-financial covenants cover a wide range of operational requirements, and breaches are surprisingly common. The most frequently breached non-financial covenants in our experience are: failure to provide information within the required timeframe (monitoring surveyor reports, financial accounts, insurance certificates), failure to comply with the approved build programme or specification without lender consent, changes to the corporate structure of the borrower (such as a change of directors or shareholders) without notification, and breach of planning conditions or building regulations.

Insurance covenants deserve particular attention. Development finance facilities invariably require the borrower to maintain comprehensive insurance covering the development works, public liability, and employer's liability, with the lender noted as an interested party on the policy. A lapse in insurance coverage — even for a single day — constitutes a covenant breach and can trigger a default event. We have seen developers lose insurance coverage because of a missed premium payment or an administrative error, resulting in a breach notice from the lender. Ensure your insurance is set to auto-renew and that premium payment dates are diarised well in advance.

Information covenants require the borrower to provide regular updates on the project's progress, finances, and any material events. The frequency and scope of reporting varies between lenders, but typically includes monthly or quarterly management accounts, copies of monitoring surveyor reports, notification of any planning or building control issues, and notification of any material contracts entered into or terminated. Failing to provide this information is a covenant breach and, importantly, can erode the lender's trust even if the project is otherwise progressing well.

Construction programme covenants are common in development finance and require the borrower to complete specified milestones within agreed timeframes. For example, the covenant might require the superstructure to be complete within nine months of the first drawdown, or practical completion to be achieved within eighteen months. If the programme slips beyond these milestones, the covenant is breached. This is why realistic programming at the outset is so important — see our guide on programme delays and development loans for detailed guidance.

Many development finance facility agreements include cure periods for certain covenant breaches, during which the borrower can remedy the breach without the lender taking further action. A typical cure period is fifteen to thirty business days for financial covenant breaches and five to ten business days for information covenant breaches. The cure period begins when the borrower receives notice of the breach (or, in some agreements, when the breach occurs, regardless of notice).

Remedying a financial covenant breach within the cure period typically requires the borrower to take action that restores the covenant ratio to the required level. For an LTV breach, this might mean injecting additional equity to reduce the loan balance — for example, if the LTV has breached at seventy-three percent against a seventy percent covenant, the borrower might need to make a partial repayment of approximately £90,000 on a £3,000,000 facility to bring the ratio back within the covenant. For an LTGDV breach, the borrower might need to provide evidence of pre-sales or revised comparable evidence that supports a higher GDV.

For non-financial covenant breaches, remediation is usually more straightforward but must be completed promptly. A lapsed insurance policy should be renewed immediately and confirmation provided to the lender. A late progress report should be submitted as soon as possible. A change in the borrower's corporate structure should be notified and consent sought retrospectively (although some lenders may treat an unauthorised change as a non-curable breach). The key principle is that the borrower should demonstrate good faith by taking immediate and effective remedial action.

If the breach cannot be remedied within the cure period, the borrower should communicate with the lender (or through their broker) to explain the circumstances and propose a realistic timeline for remediation. In our experience, lenders will often agree to an informal extension of the cure period if the borrower is engaging constructively and the breach is not causing material harm to the lender's security. A borrower who ignores a breach notice or fails to communicate with the lender during the cure period will almost always face an escalation to formal enforcement. Contact our deal room if you are facing a covenant breach and need assistance engaging with your lender.

If a covenant breach cannot be remedied (for example, because the property value has genuinely declined and no additional equity is available), the borrower can request a covenant waiver or amendment from the lender. A waiver is a one-off agreement by the lender to overlook a specific breach, while an amendment is a permanent change to the covenant threshold. Both require the lender's agreement and typically involve a fee — usually £2,500 to £10,000 depending on the lender and the complexity of the waiver.

To support a waiver or amendment request, the borrower should provide evidence that the underlying project remains viable despite the covenant breach. For example, if an LTV breach has been triggered by a property revaluation but the development is on programme and pre-sales evidence supports the original GDV assumption, this demonstrates that the breach is a function of conservative valuation methodology rather than a genuine deterioration in the project's prospects. Similarly, if an LTC breach has been caused by cost overruns that the borrower has funded from additional equity, the lender's exposure has not increased and a waiver may be readily granted.

Lenders consider several factors when assessing a waiver request: the severity of the breach (a marginal breach is easier to waive than a significant one), the cause of the breach (a market-driven breach may be treated more sympathetically than one caused by the borrower's management failures), the borrower's track record of covenant compliance (a first breach is treated differently from a repeated pattern), and the overall viability of the project. A well-prepared waiver request, presented by an experienced broker, has a high probability of success in most cases.

It is worth noting that some facility agreements contain provisions that automatically waive minor covenant breaches — for example, a provision that an LTV breach of less than two percentage points is disregarded for the purposes of default. These materiality thresholds provide a useful buffer and should be negotiated at the outset of the facility. We always seek to include materiality thresholds in the facilities we arrange, as they provide an important protection against technical breaches that do not represent a genuine threat to the lender's security.

One of the most dangerous covenant provisions in development finance is the cross-default clause. A cross-default clause provides that a default under any other facility agreement to which the borrower (or a related entity) is a party constitutes a default under the current facility. This means that a covenant breach on one development can trigger a default on all of the developer's other financed projects, even if those projects are performing perfectly.

The scope of cross-default clauses varies between lenders. Some are limited to defaults by the same borrower entity, while others extend to defaults by any entity in the borrower's corporate group, or even defaults by the guarantor personally. A developer with three projects financed by three different lenders, each with cross-default provisions referencing the other facilities, faces a potential domino effect where a single default triggers cascading defaults across the entire portfolio.

Cross-acceleration clauses are similar but more aggressive. Where a cross-default clause simply creates a default event under the current facility (which may be curable), a cross-acceleration clause provides that if the debt under another facility is accelerated (demanded for immediate repayment), the current facility is also automatically accelerated. This can create a situation where the developer faces simultaneous demands for repayment across multiple facilities, which is almost certainly unmanageable.

We always advise developers to negotiate the scope of cross-default and cross-acceleration provisions carefully. Ideally, cross-default clauses should be limited to defaults by the same borrower entity (not the wider corporate group) and should exclude technical defaults that do not result in enforcement action. Cross-acceleration clauses should be resisted entirely where possible. If cross-default provisions cannot be avoided, developers should consider structuring each development through a separate SPV with no cross-guarantees or cross-collateralisation, to contain the impact of a default on one project from spreading to others.

Maintaining covenant compliance requires proactive monitoring and management throughout the facility term. The first step is to create a covenant compliance schedule that lists every covenant in your facility agreement, the threshold or requirement, the testing frequency, and the current status. This schedule should be reviewed monthly and updated with current data from the project accounts, monitoring surveyor reports, and market evidence.

Second, build in early warning thresholds that alert you before a breach occurs. For example, if your LTV covenant is set at seventy percent, set an internal alert at sixty-five percent — giving you time to assess the situation and take preventive action before the covenant is actually breached. This might involve accelerating sales, obtaining a fresh valuation to challenge a conservative assessment, or arranging additional equity from reserve funds.

Third, maintain a positive and transparent relationship with your monitoring surveyor. The monitoring surveyor is the lender's eyes and ears on the project, and their reports are the primary mechanism through which covenant compliance is assessed. If the monitoring surveyor is raising concerns about cost overruns, programme delays, or build quality, address these concerns promptly and thoroughly. A monitoring surveyor who has confidence in the developer's management of the project will produce reports that support covenant compliance, while one who is concerned about the project's direction will highlight risks that may trigger a lender review.

Finally, ensure your professional team is aligned with the covenant compliance objective. Your quantity surveyor should be tracking costs against the approved budget and flagging variances early. Your project manager should be monitoring the programme against covenant milestones. Your solicitor should have provided you with a plain-language summary of all covenants and their implications at the time of drawdown. If any member of your professional team is not actively supporting covenant compliance, address this immediately — the cost of professional advice is minimal compared to the cost of a covenant breach. For guidance on structuring facilities to minimise covenant risk, see our guide on how development finance works.