What if a Property Development Struggles or Fails?

There is a number of reasons why any property development can go wrong. By its very nature developments are a high risk, high reward business.

In today’s ever-changing climate, with the backdrop of Covid-19 and now inflation pressure savaging costs of all businesses, it is very difficult to predict anything with confidence and things can invariably go wrong.

These and other factors, very often affect the contractors of any development.

If the contractors* are a 3^rd party working on some form of JCT contract for the construction of a development, they may have their own exposures of:

• • Cost overruns,
  • Stuck with fixed pricing, and
  • Possibly other troublesome contracts on their books. This may affect their performance and in turn, can cause huge issues for a developer.

*Construction companies continue to rank as one of the highest failure rates for insolvencies.

When projects struggle and start to go wrong, the owner/developer AND the lender have difficult decisions to make, usually limited to:

1. 1. Shall we continue with the support and/or increase the funding and resources, or
   2. Particularly for a funder if the above is not an option, then look to appoint a Fixed Charge Receiver (FCR).

For a developer, the appointment of a FCR is a disaster as:

• • They lose carriage/control of the development,
  • The price achieved for its sale is always at a discount, especially if in its unfinished state, and
  • FCR costs – which can be ‘eye-watering’.

The culmination of the above often sees the client/developer face losses. In many instances, this will see any Personal Guarantees given – called upon.

Your lender would have initially given a PGs based on Asset + Liability Statements provided by the director(s). These are the basis to seek to recover losses with the security of the PG…… Nightmare.

Very often the director/developer works with and assists the FCR. It is essential that all parties note this co-operation and support.

Too often we hear from Developers who say the Lender ‘is fine, we’re working together, it will be fine when we sit down to discuss the situation on the sale completion’.

WRONG.

Sure, you may have done the right thing morally to support the FCR, but on the sale of say an incomplete development, the loss plus costs and possibly punitive interest/charges or exit fees, will result on a claim against the PG.

The carriage of the case will pass from the friendly in-house project manager (friendly because he wants an easy life!) to their legal team.

This is where we have experience second to none. Our role sees us act of clients at any stage of a development that is going or has gone wrong.

How do we help?

We develop the strategy, including controlling attributable costs and look to settle on an amicable, economic and viable basis.

Even within this niche of property finance, the possibilities that can arise from this one route/example – are huge.

Another key point to note here that arises on the appointment of the FCR is the fact that Companies House will make an entry on the Register, effectively deeming the whole company to be insolvent. It’s not but that is how the outside financial world will perceive it.

This can very often lead to other problems, especially if the company say trades in another industry outside property. Your insolvency status is shown by a red ‘R’ on Companies House.

So, property developments as we said can be highly profitable but there are also risks are involved.

Our brief references to contractors failing and/or the involvement of FCRs in a development are only a couple of examples of what can wrong. This just gives an indication of what type of work Bell & Company get involved in.

If they do go wrong, we are here to help with our technical knowledge straddling finance types, lenders and development knowledge.

Our strategies and stamina in such cases are second to none.