Structural warranties in development finance are one of the most consistently under-scrutinised elements of a lending decision. While lenders typically specify that a warranty must be in place before funds are released, very little attention is often paid to the specifics of what that warranty covers, who underwrites it, or the implications if a project runs into difficulty.
In recent conversations with lenders and funders, a common theme has emerged. If a warranty document looks correct and the numbers broadly match the scheme, it is usually accepted. This is understandable in a high-volume environment, but it is precisely where risk builds.
Structural warranties are not interchangeable products. Policies differ significantly across several dimensions that matter directly to lenders:
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Insurer financial strength: Not all providers are backed by A-rated insurers.
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Sums insured: Whether the policy reflects the true development value and reinstatement cost.
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Build period terms: The window during which the policy remains active.
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Insolvency provisions: Whether the policy survives developer insolvency.
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Transferability: The ability to assign the warranty to a new developer, funder, or purchaser.
The real exposure lies in project distress. If a developer becomes insolvent or a project overruns, a warranty may become void. Replacing a warranty mid-project is expensive, time-consuming, and can prevent the completion or sale of a site.
Structural warranties act as a form of currency within development finance. If a lender needs to take possession of a site, their recovery options depend heavily on the warranty terms. If the policy cannot be transferred or is invalidated by insolvency, the marketability of the project is significantly reduced at the exact moment the lender needs to recover their position.
According to Timothy Woodgate, Head of Partnerships at LBB:
“Structural warranties should not be treated as a tick-box exercise. They are a substantive part of the risk structure of a development, and their quality has a direct bearing on a lender’s ability to recover their position if a project runs into difficulty.”
These issues are rarely identified at the start of a project, which is the only point at which they can be addressed cost-effectively. LBB suggests that lenders should move beyond asking if a warranty exists and instead ask: “Is this the right warranty, and will it still protect us if something goes wrong?”
By reviewing policies more carefully at the outset, specifically looking at insurer ratings and insolvency provisions, lenders can meaningfully reduce their risk exposure on development finance transactions.
