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Many bridging lenders have, in recent years, decided to try development lending – lending to a borrower for the purpose of development or a combination of purchase and subsequent development. In this article I am referring to ground up developments rather than refurbishments or conversions.
It is well documented that there is a housing shortage in the country, so property development is popular among investors and represents a viable, and often profitable, market for lenders who want to diversify their offering.
There is a danger here, however, if a lender is not used to lending in such circumstances and does not have the staff with the expertise to adequately monitor the development. It is also wise for the lender to know whether the borrower is an experienced developer or not. In recent years, I have seen many borrowers, who have spare land at the rear of their property, try to develop it themselves without the requisite expertise – and this rarely ends well.
In my opinion, it is paramount for a lender to have experienced staff in-house, supported by an external quantity surveyor (QS) involved from the outset of a ground up development. The surveyor will need to make multiple visits to the site, review the planning permission and approved plans in detail; speak with the planning department, building control inspector and relevant structural warranty company to monitor the development and ensure that the final product is going to be what was agreed from the outset.
I have seen a few cases where a QS was not involved, and the lender relied on a chartered surveyor to attend the site and provide updates before further tranches of funds were to be released by the lender. On occasion, I have seen instances where development funds were released with no advance site visit at all.
One such instance, where I am certain a QS was not instructed, involved a borrower who decided to build a detached garage for the property outside the boundaries of the land that he owned. The alleged rationale was that he had an informal agreement with the neighbour to buy the land and that it would all work out well. When he defaulted on the loan, after he and the neighbour had a dispute, the lender found out about the garage being on someone else’s land and had to resolve the situation (I fail to recall whether the garage had to be demolished, or the neighbouring land purchased). This burdened the lender with significant additional cost, which reduced the overall loan to value and loan to gross development value.
This was, of course, an unwelcome surprise and one that could have been avoided if a QS were instructed. A QS very likely would have gone back to the original boundary plans at all the relevant stages, referred to the planning permission approved plans, and raised the issue to the lender. In turn, the lender would not have released any more funds until the proposed course of action was varied. It certainly would not have gotten to the stage of even laying foundations for the garage – let alone being fully built.
I have seen other similar cases of a borrower adding extra bedrooms, bathrooms or otherwise failing to follow the planning permission approved plans which, again, are avoidable situations. Before diving into development lending, the relevant lender must ensure that it has the relevant know-how and external support to ensure that such issues are avoided.
Harry Peradigou, Partner at Brightstone Law