The Importance of Side Deeds in Construction Financing

Key Takeaway 

Construction projects are complex undertakings involving multiple parties, significant capital investment and high levels of risk. For lenders financing these developments, a borrower’s default or insolvency during construction can have serious consequences, leaving lenders exposed to unfinished works, disrupted timelines and weakened security positions. Side deeds between lenders and builders have emerged as a critical risk management tool to address these concerns.

Why Side Deeds Matter

Without adequate protections, lenders risk being left without recourse if a borrower breaches the construction contract or becomes insolvent. In such cases, lenders may face incomplete works or security that is difficult to enforce. Side deeds create a direct contractual relationship between the lender and builder, giving the lender rights that would not otherwise exist under the primary construction contract. Through these arrangements, lenders obtain rights to receive notices of default, step in to remedy breaches, enforce security interests, and ensure continuity of works. This pragmatic structure preserves the lender’s investment and mitigates potential exposure.

Standard Terms Covered by Side Deeds 

While the terms of a side deed will vary depending on the project and parties involved, some common provisions include: 

• Notice of Defaults – The builder must provide notice of defaults and allow the lender a period to step-in and cure the breach before the construction contract can be terminated. 

• Enhanced Security – Ensures that enforcement of the lender’s security interests does not trigger termination of the construction contract.

• Remedial Powers – Provides the lender with step-in rights to address borrower defaults and keep the construction contract on foot.

• Transfer Provisions – Clarifies the parties’ ability to transfer, novate, assign or otherwise deal with their rights under the construction contract and side deed.

Benefits for Lenders 

Side deeds confer significant protections and advantages for lenders, including: 

• Direct Contractual Relationship – Establishes a binding link between the lender and builder, avoiding reliance solely on borrower obligations. 

• Remedial Powers – Enhances lenders to step-in and remedy borrower defaults to prevent termination of the construction contract.

• Enhanced Security – Preserves and strengthens the lender’s security position, reducing the risk of incomplete or abandoned projects.

• Continuity of Project – Ensures that works continue despite borrower default or insolvency, preserving project value and timelines. 

Conclusion 

In construction financing, side deeds with builders are an increasingly essential risk management tool. They provide lenders with the ability to safeguard their investments, maintain continuity of works, and minimise disruption in an industry marked by volatility and rising insolvencies. For lenders, insisting on a side deed as part of any construction financing arrangement is no longer optional – it is a practical necessity to protect their interest and ensures the successful completion of projects. 

For guidance on implementing these measures or reviewing your construction financing arrangements, please contact our people.

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333