Give advice on new-builds with care

Around 10% of housing stock purchased at present is new-built and this is often bought prior to completion. This involves the purchaser assuming performance risk on both the contractor and developer.

More brokers are becoming involved with advising on mortgages on new-builds. Overlooking details can lead to big headaches down the line with this sort of investment.

Most important for brokers and consumers is the bank guarantee on new-builds. This offers peace of mind for them that in the event of financial difficulty by a developer the construction will still be completed or the consumer will get their deposit refunded.

Developers usually provide a bank guarantee to their building contractor, but what are the mechanics of such a guarantee? Providing a guarantee of the full amount of the building contract sum is unlikely to be acceptable to a developer. In theory it could procure a guarantee initially for the full contract sum and then reduce the amount of the guarantee by each sum paid to the contractor.

The commercial risk to the contractor is the value of work that he has undertaken for which he has not been paid. With development costs being drawn on a monthly basis and payments made monthly to the contractor, a figure considerably less than the building contract sum can be arrived at.

To calculate its exposure, a contractor will look at the cost of the work that has been carried out since last payment and allow for the value of work until next payment. It will also build in time for an interim certificate to be issued and for the monitoring surveyor of the developer’s bank to issue its valuation certificate, and finally for the developer to pay the contractor.

A contractor may be expected to give a collateral warranty to the bank funding the development. This should contain a requirement for the contractor to notify the bank before it stops work in the event of non-payment.

The contractor requires certainty that it will receive payment if it makes a claim. The bank also requires certainty that it is authorised to make the payment. This can be achieved by building into the documentation concepts that are used in credits provided by the banks for trade financing. The guarantee has a specified claim form attached which includes a certificate to the effect that the amount of the claim is properly due and payable.