LTV Covenant Breaches: When Property Values Fall Below Thresholds

Loan-to-value (LTV) covenants are among the most common financial covenants in development finance facility agreements. An LTV covenant requires the outstanding loan balance to remain below a specified percentage of the current market value of the secured property. Typical LTV covenants in development finance range from sixty-five to seventy-five percent, depending on the lender, the property type, and the stage of construction. A facility with a seventy percent LTV covenant and an outstanding balance of £2,100,000 requires the property to maintain a minimum value of £3,000,000.

LTV covenants are tested at regular intervals throughout the facility term — typically quarterly, although some facilities test LTV at every monitoring surveyor visit. The value used for covenant testing may be the original valuation, a desktop revaluation, or a full RICS revaluation, depending on the facility agreement. Some agreements provide that the lender can require a full revaluation at any time, while others specify that revaluations occur only at defined intervals. The precise mechanics of how and when LTV is tested should be understood clearly at the outset of the facility.

It is important to distinguish between the different types of LTV covenant that may appear in a development finance facility. The most common is loan-to-current market value (LTV), which measures the debt against the property's value in its current state (which for a development under construction is typically the land value plus the value of works completed to date). Some facilities also include a loan-to-gross development value (LTGDV) covenant, which measures the debt against the projected value of the completed development. A fall in projected GDV — due to market softening or a downward revaluation — can trigger an LTGDV breach even if the current market value has not changed.

The most common trigger for an LTV covenant breach is a decline in property values. If the property market softens — whether nationally or in the specific micro-location of the development — the value of the security falls while the outstanding loan balance remains the same (or increases, due to capitalised interest and additional drawdowns). This mechanical effect can push the LTV ratio above the covenant threshold without any deterioration in the quality of the development or the competence of the developer.

A second common trigger is a downward revaluation by the monitoring surveyor. The monitoring surveyor provides an assessment of the development's value at each site visit, and if they take a more conservative view of achievable sales prices or apply a higher discount for the partially completed state of the building, the assessed value may be lower than expected. Monitoring surveyors are required to exercise independent professional judgment, and they will reflect current market conditions in their assessment. If comparable evidence suggests that values have softened, the monitoring surveyor will adjust their figures accordingly.

A third trigger relates to the capitalisation of interest. In development finance, interest is typically rolled up (added to the loan balance) rather than paid monthly. This means the outstanding loan balance increases over time, even if no additional drawdowns are made. On a £2,500,000 facility at nine percent per annum, the loan balance increases by approximately £18,750 per month through interest capitalisation alone. Over an eighteen-month build programme, this adds approximately £337,500 to the outstanding balance, pushing the effective LTV higher. Developers should account for interest capitalisation when assessing their covenant headroom at each stage of the project.

Cost overruns that require additional drawdowns can also trigger LTV breaches. If the approved build budget is exceeded and the lender agrees to increase the facility to fund the overrun, the additional drawdown increases the loan balance and may push the LTV above the covenant threshold. Even where the lender approves the additional advance, the covenant breach must still be addressed — the lender may waive the breach as part of the facility increase agreement, but this is not automatic and should be confirmed in writing. For a detailed discussion of cost overrun management, see our guide on cost overruns and development finance.

An LTV covenant breach constitutes a default event under the facility agreement. Once a default event has occurred, the lender has the right (but not the obligation) to exercise a range of remedies, including: demanding immediate repayment of the facility (acceleration), refusing to make further drawdowns, charging default interest on the outstanding balance, and ultimately enforcing its security by appointing an LPA receiver or exercising its power of sale.

In practice, the lender's response to an LTV breach depends on several factors: the severity of the breach (a breach of one to two percentage points is treated very differently from a breach of ten percentage points), the cause of the breach (market-driven breaches may attract more sympathy than breaches caused by project-specific issues), the developer's track record and relationship with the lender, and the overall viability of the project. A marginal LTV breach on an otherwise well-performing project is unlikely to trigger enforcement, while a significant breach on a troubled project may accelerate the lender's decision to enforce.

The immediate practical consequences of an LTV breach typically include: the suspension of further drawdowns (until the breach is cured or waived), the commencement of default interest (typically two to four percentage points above the facility rate), enhanced monitoring requirements (additional site visits, more frequent reporting), and the requirement for the borrower to present a remediation plan. These consequences are significant even if enforcement does not follow immediately, because the suspension of drawdowns can stall construction and the accrual of default interest increases the facility cost substantially.

For a £3,000,000 facility, default interest at three percent above the standard rate adds approximately £7,500 per month to the interest bill. Over a three-month period while the breach is being addressed, this amounts to £22,500 in additional costs — which further erodes the project's profitability and may exacerbate the covenant breach. This self-reinforcing cycle is one of the most dangerous aspects of LTV covenant breaches, and it underscores the importance of addressing the breach as quickly as possible.

The most direct way to cure an LTV covenant breach is to reduce the loan balance to a level that restores the LTV ratio below the covenant threshold. This is achieved by making a partial repayment (sometimes called a cash cure or equity top-up). For example, if the LTV covenant is seventy percent, the current value is £3,000,000, and the outstanding balance is £2,200,000 (giving an LTV of seventy-three percent), a repayment of approximately £100,000 would reduce the balance to £2,100,000 and restore the LTV to seventy percent.

If the developer does not have £100,000 of available cash, alternative sources of equity include: releasing funds from other investments or deposits, arranging a short-term bridging loan against other property assets, bringing in a co-investor who contributes equity in exchange for a profit share, or negotiating with the lender for an alternative remedy such as additional security over other assets. Each option has costs and implications that should be evaluated carefully with your broker and solicitor.

Another strategy is to challenge the valuation that triggered the breach. If you believe the monitoring surveyor's assessment is overly conservative, you can instruct your own RICS surveyor to provide an independent valuation and present this to the lender as evidence that the covenant has not, in fact, been breached. The success of this approach depends on the quality of the comparable evidence and the credibility of the independent valuer. If the independent valuation is materially higher than the monitoring surveyor's assessment, the lender may commission a further independent valuation to resolve the discrepancy.

If the breach cannot be cured through partial repayment or valuation challenge, the developer should seek a formal covenant waiver from the lender. As discussed in our guide on breach of covenant on development loans, a waiver is a formal agreement by the lender to overlook the breach, usually for a specified period and subject to conditions. The waiver may require the developer to take specific actions (such as accelerating the sales programme or reducing asking prices) and will usually involve a waiver fee of £2,500 to £10,000.

Prevention is always preferable to remediation. The most effective way to prevent LTV covenant breaches is to structure the facility with adequate covenant headroom from the outset. If the maximum LTV available from the lender is seventy percent, consider whether a facility at sixty to sixty-five percent LTV provides a more comfortable margin of safety. The additional equity required is a form of insurance against market fluctuations, and the cost of providing slightly more equity is minimal compared to the cost of dealing with a covenant breach.

Monitor your covenant position regularly — at least monthly — rather than waiting for the monitoring surveyor's quarterly report. Calculate the LTV ratio using current comparable evidence and the current drawn balance (including capitalised interest), and track the trend over time. If the ratio is moving towards the covenant threshold, take action before it breaches — this might mean accelerating sales, making a voluntary partial repayment, or approaching the lender for a pre-emptive covenant amendment.

Consider negotiating covenant mechanics that provide flexibility. For example, some facilities define LTV by reference to the higher of the current market value and the original valuation — meaning that a temporary market dip does not trigger a breach if values subsequently recover. Others include a materiality threshold (for example, the covenant is only tested if the breach exceeds two percentage points), or a cure period that gives the borrower time to remedy a breach before it becomes a formal default event. These provisions are negotiable at the outset of the facility, and an experienced broker can help you secure more favourable covenant terms.

Finally, choose your lender carefully. Some development finance lenders take a rigid approach to covenant testing and enforcement, while others adopt a more pragmatic and relationship-based approach. A lender who has a track record of working constructively with borrowers during market fluctuations is a more appropriate partner for a development than one who enforces mechanically at the first sign of a covenant breach. We know our panel lenders' approaches to covenant management intimately and can advise on which lenders offer the most appropriate covenant framework for your specific project. Contact our deal room to discuss structuring a facility with appropriate covenant protections.

While LTV and LTGDV covenants are related concepts, they behave differently during market downturns and at different stages of the construction programme. An LTV covenant measured against current market value will typically tighten as the development progresses, because the drawn balance increases (through additional drawdowns and capitalised interest) while the current market value of a partially completed building may not increase at the same rate. An LTGDV covenant, by contrast, may remain stable during construction if the projected GDV is unchanged, but can deteriorate sharply if a revaluation reduces the GDV projection.

The interaction between LTV and LTGDV covenants can create situations where one covenant is comfortably within threshold while the other is breached. For example, a development that is eighty percent complete may have a current market value close to the GDV (because most of the construction risk has been eliminated), meaning the LTV covenant is comfortable. However, if the projected GDV has been reduced due to market softening, the LTGDV covenant may be breached. Developers must monitor both covenants independently and understand which is most likely to be the binding constraint at each stage of the project.

Some facility agreements contain only one of these covenants, while others contain both. Where both are present, the binding covenant is the one that creates the tightest constraint at any given time. In our experience, LTGDV covenants are more common in development finance than pure LTV covenants, because LTGDV better reflects the lender's economic exposure on a development project. However, some lenders use current market value LTV as an additional backstop, particularly for larger facilities or more complex developments.

When negotiating your facility, understand which covenants are included, how they are tested, and what the practical implications are at different stages of the build. If your facility contains both LTV and LTGDV covenants, request a sensitivity analysis from your broker showing how each covenant performs under different value scenarios. This analysis should be updated monthly during the build to give you early warning of potential covenant pressure. We provide this analysis as standard for all facilities we arrange — it is one of the most valuable risk management tools available to developers managing financed projects.

While most LTV covenant breaches are resolved through remediation, waiver, or negotiation, some do lead to enforcement. The situations most likely to result in enforcement are: a significant breach (ten or more percentage points above the covenant threshold) combined with a deteriorating project, a breach that the borrower cannot cure because they lack the financial resources to inject additional equity, a repeated pattern of covenant breaches suggesting the project is fundamentally unviable at current values, or a breakdown in the relationship between borrower and lender that makes constructive negotiation impossible.

If enforcement appears likely, the developer should take immediate steps to protect their position. This includes: seeking specialist legal advice on the enforcement process and the developer's rights, exploring urgent refinancing options with alternative lenders (see our guide on refinancing a distressed development), assessing the personal guarantee exposure and taking advice on managing this liability, and considering whether a consensual resolution (such as a voluntary sale or surrender) might achieve a better outcome than contested enforcement.

The timeline from LTV covenant breach to enforcement varies significantly depending on the lender's approach and the severity of the situation. In the most benign cases, the lender grants repeated waivers and the breach is eventually resolved through sales proceeds reducing the facility balance. In the most aggressive cases, the lender moves from breach identification to receiver appointment within sixty to ninety days. The developer's behaviour during this window — particularly the quality of their communication and the credibility of their proposed solutions — is often the determining factor in whether the lender chooses forbearance or enforcement.

At Construction Capital, we have helped numerous developers navigate LTV covenant breaches, from straightforward waivers to complex refinancings of distressed facilities. If you are concerned about a potential or actual LTV breach on your development facility, contact our deal room as early as possible. The earlier we are involved, the wider the range of options available and the better the outcome for the developer.