Introduction
Side deeds, also known as step-in deeds, tripartite deeds or consent deeds, are a useful document for a lender involved in construction financing.
Side deeds ensure that a lender has security over a borrower’s rights and interests in a construction project associated with a debt finance transaction. This may enable the project to be completed under the terms of the existing construction contract if the borrower defaults or becomes insolvent.
Side deeds operate alongside the primary loan agreement and construction contract with the builder and are read together to determine the full legal effect of the parties’ intentions. Side deeds also allow the lender to enter into a direct agreement with a third party, such as the builder, allowing the lender to step in if the borrower defaults.
Having this right is important as it may allow a lender to minimise their losses if a default occurs; completed projects will generally yield a higher sale price than partially completed works. This helps to maximise the amount a lender may receive from a sale following the enforcement of their security. However, it is important to note that a lender must have the builder agree to the side deed so that the works will continue in accordance with the original construction agreement.
What are side deeds and when are they used?
The parties to a side deed are usually the lender (secured party), the borrower (obliger) and the builder (a non-obliger and counterparty). Side deeds provide the lender and the counterparty a direct contractual relationship for agreements that:
- would be burdensome or expensive to replace
- are unique
- would be disadvantageous to the borrower’s operations or project if terminated.
Side deeds are used to give the lender a ‘step-in right’ as well as remedial powers to cure a default on the part of the borrower, enabling the lender to avoid the termination of the construction contract.
What do side deeds cover?
Common clauses within a side deed usually include the following:
- Contract defaults that stipulate that the counterparty will need to adhere to a remedy period where the lender may seek to step-in and cure the breach under the construction contract before it may be terminated.
- Right to remedy where the lender is entitled to cure the borrower’s breach of the construction contract. This is usually done by the lender stepping into the contract to see that the borrower’s obligations are performed.
- Enforcement of security interests that state that there will be no default or entitlement to terminate the construction contract when the lender, as a secured party, wishes to enforce their security rights.
- Transfer provisions that outline the parties’ respective rights to assign, transfer, novate or deal with their interests under the side deed and construction contract.
Side deeds can also be used by a lender who is not otherwise a party to the construction contract to exercise some control or oversight over matters such as quality and standards of the construction works, access to the site and reporting, insurance and liability, warranties and guarantees, dispute resolution, assignment of material sub-contracts and variations to the original scope of the works.
Side deeds are common, and most builders will be familiar with them. However, counterparties may be cautious when entering into a side deed as it may give the lender more control over a construction project than they would otherwise have, as well as a right to transfer the construction contract (and material sub-contracts) to third parties.
Conclusion
Side deeds are useful documents for a lender as they facilitate a direct contractual relationship with the builder, ensuring that the lender will have the ability to avoid the termination of the construction contract in an event of default. By allowing the lender to step-in to the construction contract, the lender can ensure that the obligations are fulfilled so that the contract survives. This is particularly useful in allowing a lender to mitigate their losses if the borrower defaults.
While side deeds generally benefit a lender, they may also provide benefits for counterparties as they provide overall security and assurance, especially regarding financing and borrower defaults.
Please contact a member of our team if you would like to discuss implementing a side deed in a lending and construction project.
