July 15, 2024
The construction industry has seen a steady rise in projects that are required to be backed by funding, and subsequently so too has the industry seen an increase in the number of third-party agreements. For construction projects, this third-party agreement is typically known as a Builder’s Side Deed (or also known as a tripartite deed).
This articles series will explore what a Builder’s Side Deed is, when it is typically used, key provisions and the risks for a builder to consider when required to enter into a Builder Side Deed.
What is a Builder’s Side Deed?
A Builder’s Side Deed is a legal agreement between three parties which are typically the developer (or principal), builder and the financer/lender (usually the bank) which set out the parties’ rights and obligations regarding the completion of building works, and processes involved to deal with defaults under any loan or under the building contract. This deed is often required by lenders as a means for securing their loan and a precondition to providing finance for a construction project.
Where there is a loan agreement (between the lender and the principal/developer of a project), the financer may require that the builder enter into a Builder’s Side Deed. This is essentially where the builder consents to the lender stepping in to try and resolve an event of default by the principal under a construction contract. This side deed is usually obtained by a lender where the termination of the construction contract would be materially adverse to the going concern of the borrowers’ operations or the project.
In some situations, the requirement for a side deed is not revealed until after the construction contract is executed. This can complicate the close out of negotiations or delay the commencement of the project. It is recommended that a party openly discloses the necessity for a side deed early on in negotiations to ensure that all project agreements and terms can be aligned.
Why enter a Builder’s Side Deed?
Acknowledging that prior negotiation may not be a realistic possibility, the general argument for the third party (i.e. the builder) to accept a side deed is that without one, the lender will not provide financing and then the borrower (i.e. the principal) will not have the financial capabilities to undertake the project or fulfil its obligations under the contract. Further, the third party may gain comfort that the borrower is backed by a lender, who by executing a side deed has vested interest in the construction contract and may later cure and remedy defaults. However, this does not come without risks and considerations on the part of the builder which will be explored in article 3.
There are numerous issues to consider in such agreements and it is recommended that a principal and/or contractor seek advice as to the terms of such agreements. The terms should be reviewed and negotiations (where necessary) prior to the deed being entered into, so as to avoid misunderstanding or ambiguities (particularly in circumstances where the clauses may contradict those contained within the construction contract).
LPC Lawyers
The LPC Lawyers team have a wealth of experience to assist across contractual drafting and negotiations. Through providing clients support across the duration of a project’s lifecycle, we can assist in ensuring a project’s successful and efficient delivery.
If you have any questions or concerns about your current or future projects, please do not hesitate to contact LPC Lawyers for a discussion on how we can assist.
The contents of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
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