PROJECT FINANCE - Ten Top Tips for making development project leases “bankable”

08 May 2013

Often developers will take an option over a site. The option may require the developer to use reasonable endeavours to obtain planning permission for the project and once planning permission is obtained a lease is granted to the developer. The developer will then incur significant expenditure in developing the site and it needs to ensure that the project is "bankable". To do this it is vital for the developer to make sure that the lease and project finance documentation are acceptable to any potential funder.

Ten things that the funder will want are:-

  • A funder will want to ensure that it has adequate step-in rights, whether in the lease itself or via a direct agreement. The step-in arrangements need to give the funder the ability to work the assets or sell them as appropriate. To ensure that the funder's security and step-in rights are protected, the lease needs to contain clear rights to sell or sublet or charge and limits to any forfeiture clause and no landlord break rights;
  • Normal commercial leases contain a full repairing obligation on tenants. However, this is not appropriate in project leases. A project lease should simply require that the assets be kept in a safe condition in compliance with statutes and any relevant consents;
  • The tenant will want to have a break right, so that it can break the lease in certain circumstances - for example, where the assets are damaged and cannot be economically repaired;
  • The rent review provisions need to be considered carefully. In normal rent review clauses, there are a number of assumptions and disregards. These can have a significant impact on the amount of the reviewed rent - for example, where one assumes that the land has the benefit of the necessary planning consents, this will substantially increase the reviewed rent as opposed to an assumption of vacant unconsented land;
  • If the rent is revenue based, the tenant and the funder need to be clear as to exactly what is considered to be revenue. In relation to solar or wind farm schemes, would this for example include feed in tariffs, renewable obligation certificates and the sale of electricity under a power purchase scheme?
  • Decommissioning of the assets should also be covered in detail. It is often inappropriate to require everything to be removed and it is more common to allow foundations to remain below a certain depth;
  • Commercial leases often require an authorised guarantee agreement on assignment to be provided. In a project finance lease, this obligation should be resisted;
  • Project leases often contain Force Majeure extensions or termination provisions. These can be unattractive to a funder and must be carefully considered;
  • Project leases often contain detailed environmental liability provisions. These need to be in a form satisfactory to funders;
  • Normal commercial leases often contain a full indemnity covenant by the tenant. These are not appropriate for project leases. Indemnities should be limited to breach only and the tenant should also try to get a financial cap and an exclusion of consequential losses.

Experienced legal advice is essential to avoid the pitfalls that await the unwary.

For further information, please contact:

Alex O'Connor, Partner

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