The relationship between development lenders and monitoring surveyors

By Guy Murray, Head of Development Finance, West One Loans

There are many facets to development finance, which is why communication between all parties involved should be a priority.

Whether development finance lenders are providing funds for new build, conversions or refurbishments, the relationship between the lender and the chartered surveyor is paramount.

Lenders rely on the knowledge and experience of an independent monitoring surveyor, not only to survey the development at various stages but to assess risk too.

According to RICS, the monitoring surveyor provides a specialist service so they must have “knowledge of the scheme, structure, use of debt, equity and, if any, recycled sales.” The monitoring surveyor undertakes a risk assessment which requires a full understanding of all the costs involved to complete the build, and the impact of project risks versus available funds.

The High Court case of “Lloyds Bank plc v Mc Bains Cooper” revolved, in simple terms, around more building work being added during the project but the finance could not cover it. This is a of tale of poor communication between funder and surveyor; and the net result was an incomplete development and a funder having an irretrievable capital loss.

The duties of a monitoring surveyor

From the first drawdown the funder is at risk and it is the monitoring surveyor who should be there to help and advise during the term of the loan. It is not just a case of a surveyor simply “signing off” the amount to be drawn down and writing a confirmatory report.

The monitoring surveyor should be providing a rounded view and objectively derived opinion of, amongst other things:

  •  the progress and quality of the works
  • what is being built is actually the consented works
  • the continuing capability of the design team, contractor, the employer under the contract
  • how regulatory and compliance matters are being dealt with
  • the management of the known and potential risks associated with the development
  • advice on any remedial actions required.

The lender needs reassurance that the development will be:

  • in the right place
  • as described in the planning consent
  • completed on time and within budget
  • of marketable quality
  • complete with all necessary regulatory, statutory and legal matters dealt with
  • fit for purpose with a sales or exit strategy in place
  • ready for the loan to be redeemed on or before the term ends.

Lenders rely on the monitoring surveyor

Most lenders have little or no technical surveying experience and are therefore reliant upon the appointed monitoring surveyor.

Lenders need to know at frequent intervals the status of the development in case there are any issues. If there are then the lender can communicate with the borrower and take immediate and effective action to deal with the circumstances.

Unfortunately, some monitoring surveyors lack the necessary experience to undertake the work required and are heavily reliant upon the borrower managing their own affairs properly. However, it is a wholly inadequate strategy which inhibits proper decision making by the lender particularly if the borrower is in distress and there is a real risk of capital loss to the lender.

The borrower’s experience

If the borrower is a repeat customer and experienced developer who knows what they are doing, they may have the foresight to recognise any issues that the monitoring surveyor might have missed.

But a relatively inexperienced developer is more likely to need some assistance, which is why the surveyor should be exercising their skill and judgement. Put simply it helps that the surveyor knows “what they are looking at” coupled with many years’ experience of managing the development process.

The importance of a good relationship between the surveyor, the lender and the borrower cannot be over emphasised. It could be the difference between a successful project and one fraught with problems and financial disaster.

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