July 29, 2024
Entering into a Builder’s Side Deed can pose significant risks for builders, especially when these agreements are designed to grant financiers broad control over the principal’s and builder’s activities under a construction contract.
If not carefully reviewed or aligned with the construction contract, a Builder’s Side Deed may impose unforeseen obligations on the builder, potentially exceeding what was originally agreed upon in the construction contract. The final article of this series will explore some of the risks builders should be vigilant about and offer strategies for mitigating potential issues.
Permitted Variations
A common provision in a Builder’s Side Deed is the requirement for the principal (the borrower) to obtain the financier’s prior written consent before agreeing to any variations or approving claims for variations. This prevents the developer—or more specifically, the superintendent tasked with administering the contract—from assessing or approving variation claims, regardless of the reason, even though they have the authority to do so under the construction contract.
This restriction can be problematic for builders, as variations often impact both time and cost of a project. Without the superintendent’s ability to approve claims, builders may face project delays or risk undertaking work that may not be properly accounted for or paid.
Builders should consider negotiating amendments to this clause to allow for (at a minimum) ‘Permitted Variations’. Typically, Permitted Variations are defined as variations up to a specific monetary value that the superintendent can approve without needing consent from the financier. Builders might also seek to include provisions that permit them to perform urgent remedial work required to prevent or mitigate damage to people or property, ensuring they are compensated for such work.
In cases where the Builder’s Side Deed already includes a Permitted Variation clause but sets the approval threshold too low, builders should negotiate to increase this value to better protect their interests.
Suspension / Termination
Builder’s Side Deed can also impose onerous conditions on builders with respect to their entitlement in the event of default, including their rights to suspend works or terminate the construction contract. Typically, the deed will provide that neither the builder nor the principal can suspend works or terminate the contract without prior consent of the financier.
Standard construction contracts typically have well-defined termination clauses that outline specific defaults, allow for a notice period to remedy the default, and grant the builder the right to terminate if the default is not corrected within this period. However, the deed might require that the builder provide the financier additional written notice detailing the breach, and often specifies an extended period for the financier to address the default by the principal before the builder can suspend the works or proceed with termination.
This extended ‘make good’ period is usually longer than what is stipulated in the construction contract, giving the financier additional time to remedy the default. As a result, the builder faces potential delays in addressing breaches and may be unable to terminate the contract promptly if the principal fails to rectify the issue within the agreed timeframe.
To avoid the risks associated with inconsistency, builders should ensure that If the financier wants the right to step in and address the principal’s breach, it should do so within the timeframes set out in the construction contract.
Novation
Further, Builder’s Side Deed’s may also include novation clauses that allow the financier to transfer the construction contract to a new principal if the current principal defaults. Builders may be reluctant to give the financier an unfettered right to transfer the construction contract as the incoming principal might lack the financial stability or capacity to fulfill the contract’s obligations.
To avoid jeopardising the builder’s ability to secure payment and ensure project continuity, the builder could negotiate for a provision requiring the builder’s consent prior to any novation. This ensures that the builder has a say in whether the new principal is financially viable and capable of honouring the contractual terms.
Payment Provisions
With larger scale developments, the financier will typically appoint a quantity surveyor (QS) to assess progress claims, inspect the work and recommend payment in full or in part. This can be problematic for both the builder and the principal if the terms of the Builder’s Side Deed are not aligned with the construction contract. For example:
- The appointed QS may prioritise the financier’s interests and its assessment could be influenced by the financier’s financial objectives which may not be aligned with the builder’s perspective on the value and validity of the claim;
- Further delays into the payment process, as the builder must navigate an additional layer of review and approval, impacting cash flow and project timelines; and
- In circumstances where there are conflicting timeframes for claim assessments, standard form construction contracts typically provide that if the principal does not issue a schedule within the stipulated timeframe, the progress claim is deemed the relevant progress certificate, meaning that the QS’s delay could be problematic for the principal or financier.
To manage these risks, builders should seek to ensure that the appointment of a QS is done in a fair and transparent manner. They might also negotiate terms in the Builder’s Side Deed that specify clear guidelines for the QS’s role and responsibilities, including prompt and equitable assessment of claims and an agreed process for resolving disputes.
Notices Requirements
Builders should be cautious of extra obligations and notice requirements set by the financier in a Builder’s Side Deed. Typically, the financier may demand the builder provide copies of every notice and document issued to the principal under the construction contract. These added requirements can create administrative burdens, increase the risk of inadvertent non-compliance, and potentially lead to disputes or delays. To avoid these complications, builders should aim to align the notice requirements in the deed with those in the construction contract, or alternatively, negotiate shifting these notice obligations to the principal.
Unknown Lenders
Finally, agreeing to enter into a Builder’s Side Deed with a financier, particularly a private lender whose financial capacity is unknown (or who is operating through a trust) presents significant risks for builders.
If the private lender’s financial health is uncertain or if the lender is a trust with potentially insufficient funds in its trust account, the builder may face considerable risks in project funding and challenges in recovering payments or addressing defaults. Builders should seek to verify the financial stability of the private lender and ensure transparency regarding the trust’s financial status before committing to such agreements.
Lamont Project & Construction Lawyers
A well drafted Builder’s Side Deed is essential for mitigating risks and ensuring clarity among the developer, financier and the builder throughout the construction project. The team at LPC Lawyers can to assist across all 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.
Contact: Peter Lamont or Stephanie Purser
Email: [email protected] or [email protected]
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