11 February 2014 #Construction
If you are funding a development, or your development is being funded by others, you will, most likely, have come across the phrase “step-in rights”. What are step-in rights and why do development funders want them?
Step-in rights are found in collateral warranties (or third party rights clauses) given by contractors to the funder (or funders) of a development, giving the funder a right to take over as the employer of the contractor under the building contract (or sub-contract, or consultant’s appointment, as the case may be). This way, if the employer (known to the funder as the “borrower”) defaults on its funding arrangements (i.e. goes bust), the funder can chose to take over the development to maximise the value of its security (assuming it has a charge over the development being constructed).
Contractor’s are often wary of step-in rights, but they shouldn’t be – if their employer goes under, the funder may chose to step-in, assume the role of employer, and pay the contractor monies owed pursuant to the contract. Such step-in rights are usually exercisable at the funder’s discretion, so they do not guarantee that the funder will step-in and save the day – the funder may not need to step-in to recover its investment, or may decide that the project is unlikely to provide the envisaged returns.
As an aside, a funder may (in addition to step-in rights) ask for a charge to be placed over the construction contract (or contracts), which operates as a contract between the funder and the borrower that enables the funder to restrict the way the borrower deals with the contracts.
Where the funding is considered high-risk, the funder may well require both step-in rights and a charge over key contracts. Neither should be feared!