LDI and Commercial Buildings - Are Funders finally waking up?

Three Christmases past I penned an article about the impact Latent Defects Insurance (“LDI”) could have on the UK property sector in the years ahead. I speculated then that the increasing number of contractor insolvencies was going to become a major issue and that building owners and funders were likely to be left with part completed buildings with no contractual guarantees from insolvent builders. I said that this in turn would have an impact on the ability to sell on part-complete buildings and this is one of those occasions when I hate to have been proven to be right. I realise that nobody loves a smart-arse – so sorry!

When I wrote the article, I wasn’t intending to preach “doom and gloom” and I did suggest that the way to avoid disaster was for Employers and Funders to take out LDI cover from the outset of a project. Unfortunately, clients do not always listen to good advice and will often refuse to pay the modest premiums for LDI cover at the outset of a project, particularly if the bank that is funding the project has no idea of what LDI is or the benefits it can offer by way of protection to both the bank and the borrower and has not insisted on LDI being put in place.
 
In the last three years, my colleagues and I have toured the length and breadth of the UK explaining the benefits of LDI to banks and funders. It has been a hard task. Many banks are still insisting on a plethora of collateral warranties from the Architect to the window cleaner to try and protect their position. But, as we all know, these warranties are worthless if the builder or any other member of the supply chain goes bust.
 
I could be flippant and suggest that the old model of demanding a virtual forest of collateral warranties to try and protect an employer and the funders has come from the same armies of lawyers who charge huge fees for drafting these documents, but I won’t. I do understand where these lawyers are coming from. The legal position is clear. Warranties are demanded so that beneficiaries can sue in contract for losses arising from the default of the warrantor. This is all well and good, but what happens if the warrantor goes bust? Where are you then?
 
Latent defects insurance cuts through this obvious problem.
 
A well thought out policy of LDI will insure the Employer, the funder, consecutive owners, the tenants and future tenants against losses arising from a failure of the building fabric. It will even insure against consequential losses! And before anybody says it must be expensive, think again because it is not.
 
But what about part-complete buildings where a member of the supply chain has ceased to exist? In most cases LDI cover can be bought retrospectively to insure the existing building fabric and the remaining building work yet to be undertaken against subsequent failure. Yes, it is more expensive than buying it at the outset but the shear fact that it can, in most cases, still be bought retrospectively, even if the supply chain member has gone bust, is pretty amazing.
There is increasing evidence that funders are now realising that borrowers who are committing to capital expenditure for new buildings need LDI cover purchased at the outset of the project so that all relevant stakeholders are protected by one policy of insurance. Funders are finally beginning to make LDI cover a condition of the funding. You just can’t beat the smell of fresh coffee in the morning, can you!
 
Peter Vinden is a practising adjudicator, arbitrator, expert and mediator. He is Managing Director of Vinden and he be contacted by email at pvinden@vinden.co.uk. Vinden arranges LDI insurance as part of its service offering.
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations. 

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