A recent case has underlined the importance of the project monitor’s advice to a development lender, according to a corporate lawyer. “Funding for a construction project is usually drawn down in tranches, against evidence that the borrower has incurred the project costs which are to be discharged by the loan advance” according to Philip Round, a partner at George Green LLP. “Prior to each drawdown, the project monitor appointed by the lender will report to it on the progress of the development and the borrower’s compliance with the terms of the facility.  A judgement of the Technology and Construction Court has emphasised the scope of the project monitor’s duties in the provision of those reports.”

Mr Round continues, “the case of Lloyds Bank plc v McBains Cooper concerned a loan to fund the construction of a new church. After most of the facility had been drawn down, Lloyds discovered that the borrower had insufficient equity to fund completion of the project, and Lloyds accordingly enforced its security. As the sale proceeds from the secured property fell short of the bank debt, Lloyds commenced proceedings against the project monitor, alleging that it had breached its retainer by failing to inform Lloyds in its report of the insufficiency of the overall funding and the fact that the borrower had drawn down loans to fund works which did not form part of the original specification.” 

According to Mr Round, the court had at an original trial in 2015 determined that the project monitor had been negligent. “The court held that had the project monitor discharged its duties correctly it would have pointed out certain issues to the lender which would have resulted in the lender withdrawing the facility at an earlier stage, and not permitting further drawdowns. The project monitor was therefore liable for the losses sustained by the bank from that point onwards. The recent trial was held in order to establish the lender’s loss. During the course of the judgement the court made certain detailed comments regarding the duties of the project monitor which will be of interest to development funders and their advisers.”

Mr Round elaborates, “the court stressed that the project monitor’s role was not simply to provide information to the lender, but to advise the lender on whether or not to pay the sums called for in the drawdown request, and to protect the lender from paying sums that it should not pay.”

Mr Round concludes, “lenders should therefore reasonably expect project monitors to alert them to problems with the development project, and to evaluate whether the costs are in line with the budget and whether the project is being conducted in compliance with all relevant covenants in the facility agreement.  At George Green, we are experienced in advising on bridging and developments loans, and recognise the importance of documenting clearly at the outset the development’s specific covenants with which a borrower is expected to comply.