Construction Finance Agreements UK: A Practical Guide

What this document is

A construction finance agreement is the contract between a borrower (often a developer or special purpose vehicle) and a lender that sets out how funding will be made available for a building project and how it must be repaid. In UK practice these agreements tend to follow familiar structures, but each one is negotiated around the specifics of the scheme: the site, the build programme, the exit strategy, and the security the lender expects in return.

The document will typically cover the amount advanced, interest, drawdown mechanics, conditions precedent, covenants, events of default and security arrangements such as legal charges over land or debentures over the borrowing company. Because construction involves staged payments, cost overruns and external risks like planning and weather, the wording around drawdowns, milestone certification and default tends to matter a great deal.

Getting the structure right at the outset is usually cheaper than trying to renegotiate once the programme is already under pressure.

How to use this document

1. Map the project's cashflow needs. Before approaching any lender, set out realistic figures for land acquisition, professional fees, build costs, contingency and finance costs over the life of the project. A sensible cashflow model makes it far easier to pick between a term loan, a revolving facility or a staged project finance structure. Lenders will expect this work to have been done.
2. Choose a structure that matches the risk profile. A fixed-sum term loan suits projects with predictable budgets and clear end dates, while revolving credit works better where spending is lumpy or uncertain. For larger schemes, project finance lets repayment be linked to the asset's own income or sale. Pick the structure that fits the scheme, not the other way around.
3. Negotiate the key commercial terms. Interest margins, arrangement fees, non-utilisation fees on revolving facilities, early repayment terms and the length of the availability period all affect the true cost of the money. So do loan-to-value and loan-to-cost ratios, which drive how much equity you need to put in. Push back on terms that do not reflect the risk you are actually taking.
4. Read the covenants and default clauses carefully. Financial covenants, reporting obligations and cross-default provisions can catch borrowers out, particularly where a delay on site triggers a technical breach. Look closely at what counts as a material adverse change and how disputes with the main contractor might feed through into the loan. These clauses are where most unpleasant surprises live.
5. Line up the security and intercreditor position. Lenders on construction deals almost always want security: a first legal charge over the site, a debenture over the borrowing company, assignments of building contracts and warranties, and sometimes parent company or personal guarantees. Where more than one lender is involved, an intercreditor agreement will set the pecking order. Make sure you understand what is being pledged and what that means if things go wrong.