When Letters of Intent Go Wrong: The Funder Perspective

On any construction project, there is likely to be a funder, who lends money to the client for the purposes of getting the development completed.

The funder will assess the viability of a project based on factors including:

  • size of the loan ie the amount of money the client needs to borrow (sometimes the entire cost of the works)
  • the duration of the loan (often the period from commencement to completion and beyond)
  • the risks associated with the project
  • the roles and competence of the project team
  • the quality of the completed project.

Its review of these factors will be reflected in and determine the rate and terms offered to the client/borrower.

A bad risk?

When a letter of intent is used to commence a project then it may fail to protect the funder’s interests properly.

Most importantly, the letter of intent may be a contractually binding agreement with the contractor that meets none of the requirements set out in the funding agreement as to its contents! These include:

  1. obligations to provide warranties or third party rights to the funder
  2. rights for the funder or its representatives to inspect or gain access to the works
  3. controls on assigning the rights or subcontracting obligations under the letter of intent
  4. specific funder requirements on quality, retention of title, use of retention fund, payment terms

The funder may not even be aware that the works have started and its monitoring surveyor may miss its opportunity to inspect specific elements of the works.

Any project which commences under a letter of intent risks alienating a key stakeholder, by failing to ensure that the funder’s needs and requirements are accurately passed from the client (as borrower) to the contractor due to the paucity of the letter of intent’s terms. If the funder is unhappy, this could result in the immediate withdrawal of any funding offer and a catastrophic funding gap for the client.

It is hard to think of a worse way to start a project….

 

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