What are side deeds?
In property financing, it is common for a three-way agreement to take place between the developer, builder and financier outlining all parties’ rights and obligations of how and when the building works will be completed. This is known as a tripartite deed. In this particular example, a side deed is an additional agreement on top of this that the builder and financier would enter into, giving the finance lender consent to step in and assist to resolve default situations by the developer. But side deeds are not necessarily related to just building contracts. Side deeds are very common practices in a range of contracts such as:
- leases or agreements to lease
- building contracts for the construction of a project
- supply agreements for core materials and services
- offtake agreements
- licences or other rights to use property or intellectual property.
Why do you need a side deed?
It is common for lenders to enter a side deed where something it is likely to be difficult or expensive to replace, is risky to finance, is unique or materially adverse. For example, side deeds become necessary when money is being loaned for a property that has not yet been built or improved. The implementation of a side deed can assist to prevent unexpected contract terminations and defaults from occurring when things are not easily replaceable.
What is included in a side deed?
A side deed or tripartite agreement should contain the details of the agreement and the property involved. It will typically list the rights and remedies of all three parties, from the perspective of the borrower, the lender, and the builder. Some key considerations to include in a side deed include:
- The parties to the agreement
- The objective of the agreement
- Rights and remedies of the parties
- Legal mechanics
- The borrower’s perspective
- The developer’s perspective
- Bank/lender’s perspective
- Agreed selling price
- Date of possession
- Stages and the progress details of construction
- Interest rate as applicable
- Equal monthly instalment (EMI) details
- Agreed common area amenities
- Penalty details if the booking is cancelled
- Notice of default
- Consent to security of the borrower’s rights under the contract
- Cure rights should ensure the contract is kept on food
- Enforcement powers
- Sale and transfer outlining who, how, and when various securities in the property are transferred between the parties.
As well as this, in many of these types of agreements, it is also common to see provisions outlined that are aimed to fix deficiencies in the main contract that the lender discovers during its due diligence.
More information on side deeds
When implementing side deeds, timing is key. Lenders should be proactive and start discussions about side deeds early in the initial engagement. If left too late, time becomes an unnecessary compromise which may result in a less-than-ideal contract.
If you are looking to implement a side deed or are being asked to enter into one, speak with a qualified lawyer to ensure you are clear on your rights and obligations of the contract.