Development continuation and rescue finance for stalled schemes

A development loan is sized against a cost plan and a programme agreed before the first spade goes in. When either moves far enough, the facility stops matching the project. The usual triggers are:

• Cost overrun. Steel, groundworks or services cost more than budgeted, and the lender's loan-to-cost cap means it will not increase its commitment. The monitoring surveyor stops certifying drawdowns until the gap is funded.
• Term expiry before practical completion. A delayed start, bad weather or a utility connection that arrives months late leaves the loan maturing with the building unfinished. Default interest and extension fees then start eroding your equity.
• Contractor failure. A main contractor entering administration mid-build leaves a site with incomplete work, unpaid subcontractors, and warranties that may now be worthless.
• Specification change. A prospective occupier wants a mezzanine floor, extra loading doors or a higher power supply, which improves the exit but adds cost the original facility did not allow for.
• Regulatory hold-ups. On residential buildings of at least 18 metres or seven storeys, design changes during the build need sign-off from the Building Safety Regulator, a process set out in the GOV.UK page on building control approval for higher-risk buildings. Waiting for a decision can carry a block of flats past its facility term.
• Lender withdrawal. A funder that has reduced its development lending, or treats a covenant breach as a reason not to advance further tranches, can leave a viable scheme without money even though nothing on site has gone badly wrong.

Before looking for new money, put a costed proposal to your current lender. An extension of the term, a modest increase in the facility or a standstill while you resolve a contractor problem is usually cheaper than a refinance, because there is no new valuation, no second set of legal fees and no early redemption cost. Lenders often prefer a workable plan to enforcing against a half-built site, which they would then have to finish or sell at a discount.

If the answer is no, ask for a redemption statement early. It shows the true figure a new lender must clear, including rolled-up interest, any default interest, exit fees and the lender's own costs. That number frequently comes as a surprise, and it decides whether a rescue refinance is possible at all. Where a second-charge lender sits behind the senior loan, its consent and its own redemption figure are needed too.

Illustration only, with round hypothetical figures. A developer is building six trade counter units with an expected completed value of £3,000,000. The main contractor fails with the steel frame up and the roof partly clad. The existing lender's redemption figure is £1,500,000 including rolled-up interest. A replacement contractor prices the remaining work at £800,000 against £500,000 left in the original budget, because some completed work has to be redone and a new contractor carries more risk.

A rescue lender looks at the £2,300,000 needed (redemption plus cost to complete) and adds its own fees and a contingency. If it will lend £2,000,000 against the scheme, the developer must find the balance from cash, a second charge over another property or a partner. The scheme still makes a profit, but a smaller one, and the arithmetic only works because the completed value comfortably exceeds the total debt.

Rescue money is priced for a project that has already gone wrong once, so it costs more than the original facility, and personal guarantees are close to universal. The real risk is putting further money into a scheme whose completed value no longer covers the total debt: a refinance then only delays a larger loss. Test the numbers on a conservative completed value before committing.

Do not sign a replacement building contract before the new lender's surveyor has reviewed it, as a contract the lender will not accept can delay the refinance. If your contractor has failed, check its status through the GOV.UK guidance on checking whether a company is being liquidated and the Companies House register before paying anything further. Where a lender has already appointed receivers, options narrow quickly, so early contact matters. Our guide to fixed and floating charges explains how competing security ranks.