What Happens When a Development Loan Defaults? A Step-by-Step Guide

A development loan default occurs when a borrower fails to meet one or more of the conditions set out in their facility agreement. While most people associate default with non-payment, in development finance the triggers are far broader and can include breaches of financial covenants, failure to meet build programme milestones, or even changes in the borrower's corporate structure without lender consent. In our experience arranging facilities from £500,000 to over £30,000,000, we have seen defaults triggered by circumstances that many developers simply did not anticipate when they signed their loan documentation.

The distinction between a technical default and an actual payment default is critically important. A technical default means you have breached a term of the facility agreement but have not necessarily missed a payment. For example, if your loan-to-value ratio exceeds the agreed covenant threshold because property values have dropped, you are in technical default even though you are still making scheduled payments. An actual payment default occurs when you fail to repay the loan on its maturity date or miss a scheduled interest payment where applicable.

Understanding this distinction matters because lenders respond differently to each scenario. Technical defaults are often curable — meaning the borrower can take corrective action within a specified period to remedy the breach. Payment defaults, particularly at maturity, are treated far more seriously and typically trigger the formal enforcement process much more quickly. We have seen lenders grant extensions of three to six months for technical defaults, whereas a maturity default where no credible repayment plan exists can move to enforcement within weeks.

When a lender identifies a default, the first formal step is issuing a breach notice or reservation of rights letter. This document notifies the borrower that the lender is aware of the breach, specifies which clause of the facility agreement has been breached, and outlines what remedial action the borrower must take. The notice will also state that the lender reserves the right to exercise all its rights and remedies under the loan documentation, including acceleration of the debt and enforcement of security.

Receiving a breach notice is undeniably alarming, but it is not the same as enforcement. In our experience, the breach notice is often the opening of a negotiation rather than the beginning of the end. Lenders do not want to take possession of half-built developments — the costs and complexities of completing a construction project are substantial, and the outcome is uncertain. A lender would far rather the borrower resolve the issue and repay the facility in the ordinary course.

The critical mistake many developers make at this stage is failing to respond promptly and transparently. If you receive a breach notice, you should engage your solicitor immediately and prepare a detailed response that acknowledges the breach, explains the circumstances, and proposes a realistic remediation plan. We have seen developers who responded within forty-eight hours with a credible plan secure a three-month standstill agreement, while those who buried their heads found the lender appointing receivers within weeks.

It is also worth noting that many facility agreements contain cure periods for certain defaults. A typical cure period might be fifteen to thirty business days for a financial covenant breach, during which the borrower can remedy the default without the lender taking further action. Check your facility agreement carefully — your solicitor should have flagged these provisions at the time of drawdown.

If the default is not remedied within the cure period, or if the breach is of a type that is not curable, the lender may choose to accelerate the facility. Acceleration means that the entire outstanding debt — principal, rolled-up interest, fees, and any default interest — becomes immediately due and payable. For a typical development facility of £2,000,000 to £5,000,000, the acceleration notice can represent a demand for the full amount plus penalties that may add £50,000 to £150,000 in default interest and fees.

Default interest is charged at a significantly higher rate than the standard facility rate — typically two to four percentage points above the agreed rate. On a £3,000,000 facility at 8% per annum, default interest at 12% adds approximately £10,000 per month to the outstanding balance. These costs mount rapidly and can erode the equity in the project within a matter of months. This is why early action is so important, as we explain in our guide on avoiding default on development finance.

At this stage, the borrower has limited options: repay the debt in full, negotiate a standstill or forbearance agreement with the lender, or find alternative finance to refinance the facility before enforcement action begins. If you are in this position, contact our deal room urgently — we have relationships with specialist lenders who can provide rescue finance to developers facing enforcement, though terms will reflect the distressed nature of the situation.

If the borrower cannot repay the accelerated debt or reach an agreement with the lender, enforcement proceedings begin. The most common enforcement mechanism in development finance is the appointment of a Law of Property Act (LPA) receiver. An LPA receiver is appointed by the lender under powers contained in the mortgage deed and the Law of Property Act 1925. The receiver takes control of the property and manages it with the primary objective of recovering the lender's debt.

The appointment of an LPA receiver is a significant event. The receiver effectively takes over the development — they can complete construction works, market and sell units, or dispose of the site as they see fit, provided their actions are directed towards repaying the lender. The borrower loses practical control of the project, although technically the receiver acts as agent of the borrower, not the lender. This agency structure means the borrower remains liable for the receiver's costs and any shortfall on the debt.

In our experience, receiver-managed completions are costly and time-consuming. The receiver will need to appoint new contractors (the original contractor will often have walked off site when they learn a receiver has been appointed), obtain fresh tenders, and manage the build programme without the developer's site knowledge. Receiver's fees typically range from £15,000 to £50,000 depending on the complexity of the project, and the total cost of completing and selling a development through a receivership can be twenty to thirty percent higher than the developer's original budget.

For developers with multiple projects, a default on one facility can trigger cross-default clauses in other facility agreements. This means that a default on your £1,500,000 scheme in Surrey could technically constitute a default on your £4,000,000 facility in Greater London. Cross-default provisions are one of the most dangerous clauses in development finance, and we always advise developers to understand their cross-default exposure across all facilities.

Most development finance facilities include a personal guarantee from the directors or shareholders of the borrowing entity. When a loan defaults and enforcement proceeds, the personal guarantee becomes a live liability. If the sale of the development does not generate sufficient proceeds to repay the lender in full, the lender will pursue the guarantor personally for the shortfall. This can mean the loss of personal assets including your home, savings, and other investments.

The scope of a personal guarantee varies significantly between lenders. Some guarantees are limited to a specific pound amount — for example, twenty percent of the facility, which on a £3,000,000 loan would cap your personal exposure at £600,000. Others are unlimited, meaning the guarantor is liable for the entire shortfall plus all enforcement costs, legal fees, and default interest. We always advise developers to negotiate the scope of their personal guarantee before signing — read our detailed guide on personal guarantees in development finance for more information.

In practice, lenders do not always pursue personal guarantees immediately or aggressively. The cost and uncertainty of litigation means that many lenders will negotiate a settlement with the guarantor for less than the full shortfall amount, particularly if the guarantor engages proactively and provides full financial disclosure. However, this is not guaranteed, and some lenders — particularly those backed by institutional capital with strict recovery mandates — will pursue guarantees through the courts. We have seen guarantors face county court judgments, charging orders on their homes, and in extreme cases, bankruptcy petitions.

If you are facing a potential default, the single most important step is to communicate early and honestly with your lender. Lenders are far more likely to work with a borrower who approaches them before a default crystallises than one who waits until after enforcement notices have been served. In our experience, proactive communication has saved developers from enforcement in the majority of cases we have been involved with.

Engage a specialist solicitor with experience in development finance defaults — not your conveyancing solicitor or general commercial lawyer. Development finance enforcement involves complex interactions between security documents, planning permissions, building contracts, and sometimes intercreditor agreements with mezzanine lenders. A specialist will understand the lender's position and can negotiate effectively on your behalf. Expect to pay £5,000 to £15,000 in legal fees for specialist default advice, but this is a fraction of the cost of an uncontested receivership.

Consider whether refinancing is possible. Even in a default scenario, there are specialist lenders who will refinance distressed developments — typically at rates of twelve to eighteen percent per annum with arrangement fees of two to three percent, but this may be significantly cheaper than the alternative of receivership and personal guarantee enforcement. The key requirement is that the underlying development must have sufficient value to support the new facility, and there must be a credible completion and exit strategy.

Finally, document everything. Keep records of all communications with the lender, all site progress, all expenditure, and all professional advice received. If the matter proceeds to litigation or a dispute about the lender's conduct, contemporaneous documentation is invaluable. Developers who maintain meticulous records are in a far stronger negotiating position than those who rely on memory and informal communications.

Understanding the typical timeline of a development loan default helps developers plan their response. While every case is different, the general pattern is remarkably consistent. Day one: the default event occurs — this might be the maturity date passing without repayment, or the monitoring surveyor reporting that the project is significantly behind programme. Days one to five: the lender's credit team reviews the situation and instructs their legal team. Days five to fifteen: the breach notice or reservation of rights letter is issued to the borrower. Days fifteen to forty-five: the cure period runs, during which the borrower must remedy the default or propose a solution.

If the default is not remedied, the lender will typically issue an acceleration notice around day forty-five to sixty. The borrower then has a short period — usually fourteen days — to repay the accelerated debt. If repayment is not made, the lender will move to appoint an LPA receiver, which can happen as quickly as day seventy-five to ninety from the original default event. In practice, the timeline is often extended by negotiations, particularly where the borrower engages constructively and the lender sees a realistic path to recovery.

However, we have also seen cases where lenders have moved from default to receiver appointment in as little as thirty days, particularly where the lender suspects the borrower is dissipating assets or where the development is deteriorating without active management. The speed of enforcement depends on the lender's appetite for negotiation, the severity of the default, and the lender's assessment of the risk to their security.

At Construction Capital, we work with developers at every stage of the default process. If you are concerned about a potential default, contact our deal room as early as possible. We can help you assess your options, introduce you to specialist solicitors, and — where appropriate — arrange refinancing with alternative lenders who specialise in distressed development situations.

We have arranged rescue finance packages for developments across Greater London, the South East, and the Midlands, helping developers avoid enforcement and retain control of their projects. Our panel of over forty specialist lenders includes several who specifically target the distressed and default market, offering facilities from £250,000 to £20,000,000 with completion timescales of two to four weeks where the underlying asset supports the lending.

Prevention is always better than cure. If you are currently in the market for development finance, we can help you structure your facility to minimise default risk — including appropriate headroom on covenants, realistic build programmes, and adequate contingency budgets. The time to think about default risk is before you sign your facility agreement, not when the breach notice arrives.