Banks may be optimistic about lending but, as this cautionary tale around redevelopment of a church shows, good housekeeping and communication are key for lenders and project monitors
With the UK property sector resurgent, recent statistics suggest that UK lenders are becoming more optimistic (or just less pessimistic?) about lending to the sector.
In this current market - indeed, in any market - the recent case of Lloyds Bank plc vs McBains Cooper Consulting Ltd underlines the importance to both lenders and project monitors of remembering the basics, good housekeeping and how vital communication can be, particularly on bank-financed projects.
In this case, Lloyds agreed to lend £2.625m to Miracle Signs & Wonders Ministry Ltd (the borrower) to redevelop a church in Willesden. Lloyds appointed McBains Cooper (McBains) to act as its project monitor.
Some 21 months in, the loan was virtually exhausted, but the development was far from finished. The borrower lacked sufficient funds to complete and Lloyds decided to sell the property. Lloyds lost around £1.4m (the amount of its loan less the proceeds of sale). Lloyds claimed this amount from McBains, alleging that it had been negligent in:
- Failing to inform it that the third floor of the property was being developed
- Issuing progress reports containing inaccurate information
- Failing to visit the site regularly
- Failing to discuss the funding of cost overruns with the borrower.
After a thorough analysis of the evidence in a 52-page judgment (which he himself called “long enough”), Mr Justice Edwards-Stuart held McBains liable for two-thirds of Lloyds’ recoverable loss. He found McBains was in breach of duty, in particular by failing to advise Lloyds that:
- The borrower was drawing down money for the third floor works
- There was not enough money in the loan to complete the development.
However, Lloyds had contributed to the problem through its own negligence, primarily arising from a series of internal oversights. The court held that it should bear one-third of its recoverable loss.
Interestingly, of the £1.4m loss suffered by Lloyds, the judge found that only £700,000 was caused by McBains. The remaining £700,000 resulted from the bank’s own decision to provide the loan on the terms it did just before the financial crash of 2008. So ultimately Lloyds will recover only a third of its total loss.
In reading the judgment, it is clear that there were systematic failures by both McBains and Lloyds to get the fundamentals right in funding the development. Some of these failures seem to be of the most basic, obvious nature, yet still the case made it all the way to the Technology and Construction Court.
Key lessons for project monitors and lenders are:
- Visit site before reporting on progress Amazingly, and in breach of its terms of engagement, McBains produced progress reports on five occasions without having visited site
- Avoid making assumptions There was a shortfall of at least £200,000 in the loan facility before the development had started. After certain variations and provisional sums were instructed, this grew to around £325,000. McBains assumed that the borrower was to make up the shortfall using its own funds. But, in its first eight progress reports, McBains stated that “sufficient funds remain in the [loan facility] … to complete the development”. Even without the benefit of hindsight, this statement looks extremely ill-advised. McBains also assumed that Lloyds was aware of - and content to fund - the works to be undertaken on the third floor, despite the fact that they would add little value. Lloyds, for its part, failed to push for more information on the third floor works when details appeared in McBains’ progress reports.
- Communicate and share Lloyds did not provide McBains with a copy of the facility letter. Nor did it confirm the amount of the loan to McBains, which thought it was for £2.25m only. Similarly, McBains fell below the required standards by failing to obtain this information from Lloyds and by not making strenuous efforts to obtain it.
- Be proactive in reporting McBains did not report on variations until they were formally instructed by the contract administrator, despite it being apparent that additional and varied works were being undertaken. This created a false picture in progress reports. The court made it clear that a failure to report additional costs (on the basis that no formal instruction had yet been issued) was “absurd”.
A key lesson for project monitors is to give early warning of potentially significant commercial issues as soon as they come to light. Their job is to advise the lender proactively in relation to ongoing risks, not simply to record past events. Those consultants who see the project monitor role as a “soft option” had better think again.
Gareth Stringer is a senior associate in the commercial construction team at Berwin Leighton Paisner