Legal Due Diligence in Development Finance: What Solicitors Check

Legal due diligence is the process by which a lender's solicitor investigates the legal title, planning status, and regulatory compliance of a development site before funds are released. In our experience arranging development finance facilities across the UK, this is the stage that most frequently causes delays, yet it is also the stage that developers are least prepared for. Understanding what solicitors check and why they check it gives you a significant advantage when structuring your deal.

The lender's solicitor acts as the lender's gatekeeper. Their job is to ensure that the security the lender is taking, typically a first legal charge over the development site, is valid, enforceable, and free from defects that could impair its value. This means investigating everything from the paper trail of ownership to the environmental history of the land. For a typical development finance facility of £1,500,000 to £5,000,000, legal fees for the lender's solicitor alone can range from £5,000 to £15,000, so the process is thorough.

We have seen transactions where the developer assumed legal due diligence was a formality, only to discover title defects, missing planning conditions, or unregistered rights that added weeks or even months to the completion timeline. The developers who move fastest through this process are those who instruct their own solicitor early, commission searches upfront, and prepare a comprehensive legal pack before the lender's solicitor is even instructed.

The first thing the lender's solicitor examines is the legal title to the property. They obtain official copies of the title register and title plan from the Land Registry to confirm that the borrower, or the borrower's SPV, is the registered owner or has an enforceable contract to acquire the site. If you are purchasing the site simultaneously with the drawdown of your development finance, the solicitor will review the acquisition contract to ensure it is unconditional and that the purchase price aligns with the lender's valuation.

Title investigation goes far beyond confirming ownership. The solicitor will review every entry on the charges register to identify existing mortgages, charges, or restrictions that need to be discharged or subordinated before the lender can take a first legal charge. They examine the property register for any restrictive covenants, easements, or rights of way that could affect the proposed development. A restrictive covenant preventing construction above two storeys, for example, would be a fundamental issue for a three-storey apartment scheme.

In our experience, the most common title issues that delay development finance completions include unregistered land, where the title has never been registered at the Land Registry and requires first registration; defective title chains, where historic transfers were not properly executed; and discrepancies between the title plan boundary and the physical site boundary. Each of these issues is resolvable, but resolution takes time. We always advise developers to obtain official copies of their title and review them with their solicitor before submitting a finance application, so that any issues can be addressed in parallel with the lender's credit process.

The lender's solicitor will verify that valid planning permission exists for the proposed development scheme. This means checking that the planning consent matches the scheme described in the development appraisal and that no conditions remain outstanding that would prevent the commencement of works. Pre-commencement conditions are particularly important because starting work without discharging them can invalidate the entire planning permission, a risk no lender is willing to accept.

Common pre-commencement conditions include the submission and approval of a construction management plan, archaeological investigation, contamination remediation strategy, drainage scheme, and details of external materials. Each condition requires formal discharge by the local planning authority, which can take eight to twelve weeks. We have arranged facilities where the developer had full planning permission but had not discharged a single pre-commencement condition, adding three months to the project timeline before the first brick could be laid.

The solicitor also checks the planning permission for any Section 106 obligations or Community Infrastructure Levy liabilities. A CIL liability of £150,000 on a residential scheme in Greater London needs to be factored into both the development appraisal and the cash flow. If these obligations have not been properly accounted for, the lender may adjust the facility amount or require additional equity from the developer.

For schemes relying on permitted development rights rather than full planning permission, the solicitor will verify that the prior approval is valid and that the proposed use falls within the relevant class order. This is a highly technical area where errors are common and the consequences severe.

A standard suite of property searches is commissioned as part of legal due diligence. These include local authority searches, environmental searches, water and drainage searches, mining searches where applicable, and chancel repair liability searches. The cost of a full search pack typically ranges from £300 to £800 depending on the location and the number of specialist searches required.

Environmental searches are increasingly important in development finance transactions. The environmental search report identifies potential contamination risks based on the historical use of the site and surrounding land. A site with a former industrial use, fuel storage, or proximity to a landfill will flag on the environmental search and may require a Phase 1 desk study or even a Phase 2 intrusive investigation before the lender will proceed. We have seen environmental remediation costs range from £20,000 for minor contamination to over £500,000 for heavily contaminated brownfield sites.

The local authority search reveals a wealth of information including road schemes, conservation area status, tree preservation orders, smoke control zones, and any outstanding enforcement notices. The water and drainage search confirms whether the site is connected to mains water and sewerage, and whether any public sewers cross the site that would restrict the building footprint. These are not merely bureaucratic exercises. A public sewer running beneath your proposed building footprint can require a build-over agreement from the water authority or, in the worst case, redesign of the scheme to avoid the sewer entirely.

Once the lender is satisfied with the due diligence findings, the lender's solicitor prepares the facility agreement and associated security documents. The borrower's solicitor must review these carefully. The facility agreement sets out every term of the loan including the interest rate, drawdown mechanics, financial covenants, representations and warranties, events of default, and the conditions precedent that must be satisfied before the first drawdown.

The security package typically includes a first legal charge over the development site, a debenture over the borrower company's assets if the borrower is a limited company or SPV, personal guarantees from the directors, and an assignment of the building contract, professional team appointments, and insurance policies. Each document requires careful review to ensure that the terms are commercially acceptable and that the developer understands their obligations. In our experience, developers who skip the detailed review of their facility agreement are the ones most likely to encounter problems during the build, particularly around drawdown conditions and default triggers.

We always recommend that developers engage a solicitor with specific experience in development finance transactions. A residential conveyancer or general commercial solicitor may not be familiar with the nuances of drawdown mechanics, monitoring surveyor provisions, or the implications of specific financial covenants. The cost of instructing a specialist is typically £3,000 to £8,000 for the borrower's legal fees, but this investment can prevent far more expensive problems later. If you are ready to proceed with your development, submit your deal and we will connect you with experienced legal professionals.

The most frequent pitfall we encounter is developers treating legal due diligence as an afterthought. They focus on the commercial terms of the loan, the interest rate and the LTV, and assume the legal process will take care of itself. In practice, legal due diligence is the critical path in most development finance transactions. A deal that receives credit approval in two weeks can easily take another six to eight weeks to complete if the legal pack is not properly prepared.

Missing or incomplete documentation is another common issue. The lender's solicitor will require certified copies of all planning permissions and decision notices, discharge of condition notices, building regulation approvals, party wall awards, the building contract, professional appointments for architect, structural engineer and other consultants, and evidence of insurance. Gathering these documents takes time, and every missing document adds to the completion timeline. We advise developers to compile a digital legal pack from the very start of the project and keep it updated as new documents are produced.

Finally, developers sometimes instruct the cheapest solicitor they can find, only to discover that the solicitor is unfamiliar with development finance transactions and cannot respond efficiently to the lender's solicitor's enquiries. This false economy can cost thousands of pounds in delayed drawdowns and extended interest accrual. In our experience, the best outcomes are achieved when both solicitors are experienced in development finance and can communicate in the same professional language, resolving issues quickly and keeping the transaction on track.