Financier’s Side Deeds – Pure vs Hybrid
- What is a financier’s side deed, often referred to as a builder’s side deed or a financier’s tripartite deed? As the name suggests, such a side deed is between the financier on a construction project, the developer and the builder. It is a three way agreement.
- Usually these deeds are relatively simple. The main purpose of the side deed is to grant the financier rights to step-in to the shoes of the developer if the developer is not properly managing the project. The rationale is that the financier needs to be able to seek to protect its funds loaned, before the development finds itself in a loss-making position. As such financier’s side deeds are really about protecting the financier’s position during delivery of the build.
- There are many forms of financier’s side deeds. The residential apartment building market has developed what we regard as “hybrid” financier’s side deeds. That is, deeds which go beyond simply permitting the financier to step-in. Rather, a hybrid form of financier’s side deed is really also a deed of variation to the building contract. That is, there are terms in the side deed which will override the terms of the building contract. The power to override is usually expressly stated in the tripartite deed, such that to the extent there is an inconsistency with the building contract and the tripartite deed, the terms of the tripartite deed will prevail. These deeds can have some interesting provisions for contractors which need careful review.
- There are a number of provisions that contractors will usually want to negotiate. One of the primary issues is the contractor’s liability under the tripartite: it should not exceed the contractor’s liability under the building contract. That is because usually the contractor will negotiate a limit of liability under the building contract. And the tripartite grants the financier rights against the builder w if there are defaults under the building contract. As such the contractor does not want to have a greater risk to the financier than it has negotiated to the developer.
- Tripartite deeds will usually place additional burdens on the contractor before it enforces its rights under the building contract. That is, where there is a developer default under the building contract, there will usually be a prescribed notice and notice period for which the contractor must give the developer, so that the developer can seek to cure the default. Only after that notice period may the contractor take additional steps (ie suspend and/or terminate). However the tripartite agreement may vary that regime, such that the contractor must give the financier the notice to show cause as well as the developer, and the timeframes may different. Hence contractors need to be careful to consult both deeds before taking any actions under the building contract.
- Almost always the financier’s side deed will prohibit the contractor from acting on any instructions from the developer that would result in a variation amount (either individually or in the aggregate) over a certain monetary threshold or which would result in a prolongation of the works (that is, with the contractor claiming an EOT) beyond a certain number of days, without first obtaining the consent of the financier. Depending on the deal and how the contract is being managed and administered, this can be problematic. Because it adds a layer of administration to the contractor and is contrary to the requirements of the building contract, which is for the contractor to proceed with directions from the principal developer.
- Some tripartite deeds will go further by inserting a power of attorney into the document, such that the contractor grants a power of attorney in favour of the financier for the financier to sign any and all documents related to the side deed on behalf of the contractor. Such a clause is unacceptable.
- All these kinds of clauses are hallmarks of a “hybrid” tripartite, where the side deed in effect varies the terms of the building contract. Timing can be an issue as well, where the tripartite is presented to the builder after the building contract has been signed (unusual yes, unheard of no). As such care should be taken when reviewing tripartite deeds to ensure they align with, as best they can, the building contract.
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