When looking to provide finance to borrowers to fund the acquisition of real property, lenders often look to insert covenants relating to the property being financed. A covenant, otherwise referred to as an ‘undertaking’, is a promise given by a borrower or a security provider to do or not do a particular thing.
Any breach by a borrower or security provider of any undertakings has the potential to trigger an event of default under the facility agreement.
The type of transaction will usually determine the undertakings to be captured under such a document. For example, undertakings relating to the preservation of a property’s value or maintaining a minimum value will typically be included in a facility agreement for a property financing.
Here, senior associate Grant Schulz and lawyer Kate Dart highlight some other property related undertakings commonly seen on real estate financings.
Property related undertakings
- Restrictions on the title to the property—following registration of the lender’s mortgage, the borrower is prevented from permitting or registering any caveat or other interest over the title to the property without the lender’s prior consent.
- Maintenance—the borrower needs to take steps to ensure all buildings, fixtures and fittings on the property are maintained in a good state of repair and condition. If the property is designed to be let, the borrower must ensure that at all times the property may continue to be let.
- Development—unless the loan is advanced in connection with the development of a property, the borrower is prevented from applying for developmental approval or carrying out demolition or structural alterations to the property without the lender’s prior consent.
- Leases—the borrower is required to comply with its obligations under a lease and to collect all rent in a timely manner, and ensure the tenant complies with its obligations under the lease.
- Notices—the borrower is required to provide the lender with any notices or orders given by a public or local authority with respect to the property within a certain timeframe.
- Power to remedy—where a borrower fails to comply with its obligations under a facility agreement in relation to the property, the borrower must allow the lender to enter the property and take any action necessary to remedy the breach, with the borrower bearing the cost of the action.
- Insurances—the borrower is required to obtain and maintain insurance for the full replacement value of the property at any time money is owed to the lender. The borrower must also ensure the lender’s interest is noted on any insurance policy.
- Environmental matters—where applicable, the borrower is required to follow the conditions of any environmental permit or law which may affect the property.
- Valuations—a requirement for the borrower to obtain a valuation of the property once every 12 months during the life of the loan or on terms otherwise required by the lender.
- Project undertakings—these include certain undertakings relating to the development of the property to ensure any works undertaken are to a high standard as may be approved by a quantity surveyor acceptable to the lender, and to ensure any cost overruns on the development are monitored on a regular basis.
A breach by a borrower or security provider of any undertakings may trigger a default under the facility agreement.
If you are considering entering into a property finance related transaction and would like more detail about the standard property undertakings seen in the market, please contact a member of our Banking & Finance team.