Developer’s Policy
Introduction
The underlying aim for any developer is profit; yet delays, funding issues and cash flow primarily seem to obstruct this aim.
In the current climate, delays can occur from any source, whether it is the fault of nervous lenders or subcontractors. In addition, cash flow is, and will always remain, a concerning issue, and lenders are becoming increasingly nervous about who they lend money to during the so called credit crunch.
Taking into account the above factors, developers and their advisors are constantly searching for says in which to speed up the development process in order to eliminate delay, limit the costs and raise potential profit. In order to realise these objectives, they are looking to obtain insurance to progress from day one, when the development site is potentially purchased, to completion of the build and sell on, with minimal disruption and maximum profitability.
Any title risks associated with the development site will affect the developer from day one. As a result, many developers and increasingly their lenders, require insurance to cover the level of investment from this point through to the planning stage and beyond. Unfortunately, providing cover from day 1 on a preplanning basis can be a costly affair, as it is often based on the full developed value and the insurer does not have the benefit of possible objectors at the planning stage, thereby increasing the potential risk, and cost, to the insurer.
The Developer's Policy
The alternative for many insurers is to offer insurance based on a capped value, rather than the ross developed value of the project. Unfortunately, this can be unattractive to a number of lenders, due to the risk of underinsuring and the risk to their return of investment. Problems can therefore ensue with the lender refusing this potential cover, which may further delay the project, thereby increasing the costs to the developer.
First Title understands the problems which developers face in order to bring developments through to completion and profitability. First Title has tailored an insurance policy that seeks to allay the fears of the developer, and is aptly known as The Developer's Policy.
The Developer's Policy enables cover to be drawn down in two stages: at the outset of policy coverage (stage one) and following the grant of planning permission (stage two). The payment of the premiums for stage one and two are therefore staggered which assists the developer with any cashflow issues. The policy also enables the developers to place cover from day one with the requisite comfort that this brings. In addition, as the indemnity level is for the fully developed value, any lender can seek comfort in the fact that the full amount of their loan has been covered.
Case Study
First Title received an enquiry from a firm of solicitors whose client was a local developer, which was purchasing a piece of land that was being used as halls of residence for a local university. The developer was paying a substantial sum for this piece of land and the ultimate aim was to submit a planning application to build numerous houses on the site.
However, there were various historic restrictive covenants noted on the title deeds to the land that would have restricted the developer's proposed development of the site. One of the restrictive covenants stated that no buildings should be constructed anywhere on the land, except in accordance with plans approved in writing by the original vendor.
The proposed development was likely to have a gross developed value in excess of £15million. Clearly, the developer wanted to protect against this potential financial interest as did his mortgage lender. Therefore, a preplanning title insurance policy was required because although they did not have planning permission to implement their plans, they still wanted to protect the financial interest that they had in the land.
A preplanning policy is always more expensive than a postplanning policy, as the underwriter does not have the benefit of viewing objection letters raised to the submitted planning application that could flush out any beneficiaries of the restrictive covenants. The risk is therefore greater, as it cannot be fully assessed.
The developer did not want to pay the cost of a full preplanning policy, as the concern at the back of their mind was that they might never obtain planning permission. First Title's solution was to offer the client The Developer's Policy, whereby they would pay 40% of the total premium upfront and were covered for the full value of the development from day one. In the event that they obtained planning permission, they could decide whether to pay the remaining 60% of the premium and enable cover to continue, or not pay the remaining amount and cover would then fall away.
The benefit to the client was that their mortgage lender was satisfied that their interest was protected. The developer could also go onto the site and start preliminary works, such as erecting site notices, knowing that they had the benefit of a title insurance policy should these preliminary actions notify a potential beneficiary of the covenants.