The assumption seems to be that a smaller deal carries smaller risk.
It doesn't.
Smaller schemes can be every bit as structurally and financially complex as larger ones, and funders skipping warranties on them are taking on exposure they have not properly priced.
What a Warranty Actually Gives You
A collateral warranty creates a direct contractual relationship between a funder or future purchaser and a member of the design team or contractor, even though no contract exists between them under the main building contract or appointment.
That relationship carries real, practical value:
- A licence to use and copy design information
Essential if a scheme stalls and a different contractor or design team needs to complete the works using the existing package. - Step-in rights
The ability for a funder to take over a contractor's or consultant's position under their contract, rather than terminating and starting again from scratch. - A direct contractual right to design information
Not a matter of goodwill or informal cooperation. This becomes particularly valuable where the original employer is insolvent or unresponsive.
None of this is especially visible on a performing scheme. It becomes essential the moment something goes wrong.
Where the Value Is Realised
The real test of a warranty suite comes on a distressed or insolvent development.
Where a contractor becomes insolvent, or a scheme is mothballed part way through construction, a funder's only meaningful route to recourse is often against the design team or contractor directly. That route only exists if a properly executed warranty is in place.
Without one, a funder is left relying on a borrower's rights under contracts it has no standing to enforce.
The same logic applies on the sale side.
Purchasers of a completed or part-built site, whether acquiring from an administrator, a receiver, or a distressed seller, will typically expect a full suite of collateral warranties as a condition of completing the transaction. Their own funders and insurers often require it.
Missing or incomplete warranties do not usually kill a deal outright, but they routinely:
- Limit the buyer pool
- Depress value
- Extend legal timescales
- Increase due diligence requirements
The Cost Justification Doesn't Stand Up
The usual reason warranties get dropped on smaller deals is cost and time. The perception is that bespoke negotiation is not worth it on a modest facility.
That reasoning falls apart on inspection.
Industry-standard forms, such as those published by the CIC, JCT and BPF, are perfectly adequate on the majority of transactions, including smaller ones, and generally require little or no meaningful negotiation.
There is no significant saving achieved by omitting warranties. The risk is merely deferred.
In practice, the cost and complexity of attempting to secure a missing warranty after a contractor has become insolvent far outweigh the effort of putting a standard-form warranty in place at the outset.
Timing Is Everything
As with most protective documentation, timing determines how easy, and how inexpensive, a warranty is to obtain.
Securing warranties during construction, while the design team and contractor remain engaged and solvent, is usually straightforward and often built into appointment terms as a matter of course.
Trying to obtain the same warranty after:
- A contractor has entered insolvency
- A consultant has left the project
- A dispute has arisen between the parties
is a materially harder, and often unsuccessful, exercise.
By the time a funder or purchaser discovers a warranty is missing, the leverage needed to obtain one has usually disappeared.
A Small Document With Outsized Consequences
Collateral warranties rarely feature prominently in transaction negotiations. Yet they are consistently among the documents most scrutinised, and most commonly found wanting, when a scheme runs into difficulty.
At KR8 Advisory, we regularly see distressed and stressed real estate mandates where the absence, or poor drafting, of a warranty suite has materially delayed a transaction that should otherwise have been straightforward.
The lesson is simple:
Build mandatory collateral warranties into facility documents and development agreements from day one. Use standard forms where appropriate and secure them while the relevant parties are still willing and able to sign.
It is a modest amount of diligence for a document that, when things go wrong, can mean the difference between having recourse and having none at all.
