Development Finance Facility Agreements: Key Clauses Explained

A development finance facility agreement is the legally binding contract between the borrower and the lender that governs the entire loan. It sets out the amount of the facility, the interest rate, the drawdown schedule, the conditions under which funds will be released, the representations and warranties given by the borrower, the financial covenants that must be maintained, and the events that will trigger a default. In our experience arranging development finance for projects ranging from £500,000 to £25,000,000, the facility agreement is the document that determines the success or failure of the borrower-lender relationship.

Unlike a standard mortgage offer, which is relatively straightforward, a development finance facility agreement is a complex commercial lending document that can run to sixty or more pages. Every clause has been drafted to protect the lender's position, and while many terms are non-negotiable, there are areas where an experienced borrower's solicitor can achieve more favourable terms. The key is understanding which clauses are standard market practice and which represent the lender taking an aggressive position that warrants pushback.

We strongly recommend that every developer reads and understands their facility agreement before signing it. Too many developers sign without fully appreciating the implications of specific clauses, particularly around drawdown conditions, cost overrun provisions, and default triggers. Ignorance of the terms is not a defence when things go wrong on site.

The drawdown provisions are the operational heart of the facility agreement. They specify the conditions that must be satisfied before each tranche of the loan is released. These conditions typically fall into two categories: conditions precedent to the initial drawdown, which must be satisfied before any funds are released, and conditions precedent to subsequent drawdowns, which must be satisfied before each construction tranche.

Conditions precedent to the initial drawdown usually include satisfactory completion of legal due diligence, receipt of a satisfactory valuation, evidence that all planning conditions have been discharged, execution of the building contract, evidence of all required insurances, and confirmation that any required equity contribution has been made. For a typical £2,000,000 facility, the borrower might need to demonstrate that they have invested £400,000 of equity before the lender advances any funds.

Subsequent drawdown conditions typically require a satisfactory monitoring surveyor report confirming that works have progressed to the stage claimed in the drawdown request, that costs remain within budget, and that there are no material defects. The facility agreement will specify the minimum notice period for drawdown requests, usually five to ten working days, and may limit the frequency of drawdowns to monthly intervals. Understanding these mechanics is essential for cash flow planning. A developer who expects to draw funds weekly will be disappointed to discover that the facility agreement limits drawdowns to monthly tranches with ten working days notice.

We have seen developers run into serious cash flow problems because they did not understand the drawdown mechanics in their facility agreement. If your contractor requires weekly payments but you can only draw from the lender monthly, you need working capital to bridge the gap. This is a point we always raise when structuring deals for our clients.

Financial covenants in a development finance facility agreement are ongoing obligations that the borrower must maintain throughout the life of the loan. The most common covenant is a loan-to-value ratio, expressed either as a percentage of current market value or as a percentage of gross development value. If the covenant requires that the loan does not exceed 65% of GDV and sales values fall during the build, the borrower may find themselves in breach and required to inject additional equity or face a default.

Other financial covenants may include a minimum profit margin covenant, typically requiring that the projected profit on GDV does not fall below 15-20%, and a cost overrun covenant requiring the borrower to fund any cost overruns from their own resources before additional lending is made available. Some lenders also impose a minimum net worth covenant on the borrower or its guarantors, requiring them to maintain personal net assets above a specified level throughout the loan term.

Reporting obligations accompany these covenants. The facility agreement will typically require the borrower to provide monthly progress reports, updated cost schedules, sales or marketing reports, copies of all monitoring surveyor reports, and notification of any material adverse change to the project. Failure to comply with reporting obligations can itself constitute an event of default, even if the project is progressing well. We always advise developers to diarise their reporting deadlines and treat them with the same importance as drawdown requests. A lender who receives timely, comprehensive reports is far more likely to be supportive if issues arise later in the build.

The events of default section is arguably the most important part of the facility agreement for developers to understand. An event of default gives the lender the right, though not the obligation, to demand immediate repayment of the entire facility, enforce its security by appointing a receiver or exercising its power of sale, and refuse to make any further drawdowns. The consequences of default can be catastrophic for a developer, resulting in the loss of the site, the project, and potentially personal assets if guarantees are in place.

Standard events of default include failure to make any payment when due, breach of any financial covenant, breach of any representation or warranty, insolvency of the borrower or any guarantor, material adverse change in the borrower's financial position or the project, cross-default provisions that are triggered if the borrower defaults under any other lending facility, and failure to achieve practical completion by the longstop date specified in the facility agreement. The longstop date is particularly important. If your facility agreement specifies a completion date of eighteen months and your project overruns, you could be in default even if the project is 95% complete.

In our experience, the events of default that most commonly affect developers are cost overruns that breach the cost-to-complete covenant, programme delays that threaten the longstop date, and failure to maintain required insurance. Each of these situations is manageable if identified early and communicated transparently to the lender. A lender who is informed of a two-month delay with a credible recovery plan is far more likely to grant a waiver or extension than one who discovers the delay from a monitoring surveyor report. If you need help understanding your development finance obligations, our team can guide you through the process.

The security package in a development finance facility agreement typically comprises multiple layers of protection for the lender. The primary security is a first legal charge over the development site, which gives the lender the right to sell the property if the borrower defaults. In addition, the lender will usually require a debenture over the borrower company, which creates a fixed and floating charge over all the company's assets, and an assignment of the building contract, professional appointments, and all insurance policies related to the project.

Personal guarantees are standard in development finance, particularly for smaller developers and SPV structures where the borrowing entity has no assets beyond the development site. The guarantee typically covers the full amount of the facility plus interest, costs, and expenses. Some lenders cap the guarantee at a percentage of the facility, say 25-50%, while others require unlimited guarantees. The scope of the guarantee is a key negotiation point and one where experienced borrower solicitors can often achieve better terms. On a £3,000,000 facility, the difference between an unlimited guarantee and one capped at 25% represents potentially millions of pounds of personal exposure.

We also see lenders requiring collateral warranties from the main contractor, architect, and structural engineer. These warranties give the lender the right to step into the developer's shoes and enforce the terms of these appointments if the developer defaults. While collateral warranties are standard in the construction industry, obtaining them can take time and some professionals charge additional fees. It is important to factor this into your pre-completion timeline and ensure that your professional team is aware of the requirement from the outset.

While much of the facility agreement is standard, there are several areas where negotiation is possible and advisable. The longstop date should include a reasonable buffer beyond your expected completion date. If your build programme is twelve months, push for an eighteen-month longstop to allow for unforeseen delays. The cost overrun provisions should be realistic; some lenders require the borrower to fund all overruns from equity, while others will consider lending additional funds subject to the project remaining viable. The interest rate default margin, the additional interest charged during a default event, varies significantly between lenders and is worth negotiating.

The drawdown notice period is another negotiable point. Ten working days is standard, but some lenders will agree to five working days for experienced borrowers with a proven track record. The minimum drawdown amount, typically £25,000 to £50,000, can also be negotiated if your build programme involves smaller, more frequent stages. For smaller schemes with a total build cost of £300,000 to £600,000, a minimum drawdown of £50,000 can be restrictive and worth discussing with the lender.

Our practical advice is to instruct a solicitor who regularly acts for borrowers in development finance transactions. They will know which clauses are market standard, which represent aggressive lender positions, and where there is room for negotiation. A good borrower solicitor will produce a detailed report on the facility agreement highlighting key commercial points, risk areas, and recommended negotiations. This report is invaluable and should be discussed thoroughly before the facility agreement is signed. Submit your deal to us and we will ensure you have access to solicitors who specialise in this area.