In House Lender

When a lender borrows funds to a building contractor for building, he usually retains some amount of oversight over payments in negotiated instalments. Lending documentation, as well as mortgage and contract loans, usually require that the lender requires an initial check before the amount of the credit is used. Some of the audits are performed by external architect or inspector and some by the lender's employees.

It is the objective of the lender's inspectorate to certify that the expenditure on the loans is being used to finance the building and that the building is progressing according to plan. Creditors want to know whether the value of the land pledged will cover the bank's credit. Could the lender's inspections lead to liabilities for building impacts?

Court of law often finds that a building sponsor is not obliged to monitor the building and developing of properties vis-à-vis the debtor or third party, unless exceptional conditions exist. Although the lender and the borrowing party agree in the lending documentation that the lender has the right to visit the structure, this does not normally create an obligation for the lender to the borrowing party or third party to make sure that the structure is built correctly or is free from deficiencies in the planning or execution of the work.

The same applies if the lender calculates an examination charge. However, creditors may be held responsible for building deficiencies if they are active in the building of the improvement or managing the overall operation of the property or take overall responsibility for the general contractors, to the extent that a judge can classify the lender-borrower ratio as a JV.

As the lender's involvement or oversight in the design increases, so does the ability of a judge to find that the lender is outside his ordinary credit business and responsible for building faults. Creditors often add clauses to their credit records to minimise possible liabilities.

Lending documentation, for example, may stipulate that the lender's right to visit the pledged object and to supervise the transactions and activity carried out on the pledged object is exclusively and expressly intended to protect the lender's interests and benefits the lender alone. Furthermore, borrowing documentation may further state that neither the Mortgagor nor any third parties have any claim against the Lender as a consequence of such inspection and that the Mortgagor does not assume any liability on the part of the Mortgagor or any third parties with respect to the building performance of the Projects, the conformity of the Design with the Technical Design Data or any defect in the Design.

Recognising that building in South Florida continues to thrive, creditors should know their legal obligations and how to reduce their exposure to legal disputes.