REAL ESTATE PROJECT FINANCING: CONTRACTING & TRANSACTION DOCUMENTATION GUIDE

Series 2 – Contracting Guide for Financiers/Investors

Introduction

Financiers, both individual and institutional, play a pivotal role in the Nigerian real estate sector by providing the capital necessary to transform ambitious ideas into tangible developments. However, the complexities of Nigeria’s economic landscape—including fluctuating exchange rates, inflation, and regulatory uncertainties—necessitate robust transaction documentation to protect their investments and ensure repayment.

In our first series, we touched on the key terms that development companies should look out for in drafting and negotiating transaction documentation in Nigeria’s real estate sector. In this edition, we will examine the essential clauses in real estate documentation, with a focus on how financers and investors in real estate projects can mitigate risks and enhance the success of their projects.

Clauses for Real Estate Project Financiers/Investors

Below are key clauses and practical considerations for financiers/investors in the Nigeria context:

Repayment Clause

The repayment clause must clearly outline the repayment amount, frequency, applicable interest rates, and penalties for late or missed payments. For example, a simple repayment clause may read thus: “An interest rate of 15% per annum shall be applied to the Loan. The borrower shall repay the Loan (principal and interest) in 12 equal installments, as described in the repayment schedule attached, commencing six months after project commencement.”

For financiers, repayment clauses provide clarity on when and how their capital will be returned. For institutional financiers, such as banks or investment funds, the inclusion of realistic repayment schedules mitigates the risk of non-performing loans. In some cases, borrowers may request for quarterly repayment frequency as against monthly repayment frequency, to manage their liquidity more efficiently. In Nigeria, where project delays may occur due to prolonged approval processes or adverse economic conditions, it is considered best practice for financiers to include grace/moratorium periods (e.g. 6 or 9-month moratorium periods) in the repayment clause. From a practical perspective, a moratorium permits the project to get to a commercially viable state—e.g. the borrower being able to develop bare land using the debt capital raised and commence selling plots— before loan repayment commences. This could also allow the parties to adjust to unforeseen circumstances that are typical in real estate projects. Additionally, penalties for delayed payments—such as default interest rates or additional fees—should be expressly included to disincentivize late repayments while preserving the financier’s cash flow/margins, where repayment delays occur.

Security Clause

Security clauses are essential for mitigating the risk and managing the default outcome. Financiers often require collateral, which may include a mortgage on the project property, a completion bond issued by the developer’s bank in favour of the financier, personal or corporate guarantees, or security over movable assets. The security clause should specify the collateral, including warranties regarding the borrower’s title over the collateral, outline the nature of security rights, grant the financier an unconditional right to enforce the security and detail the procedures for enforcement in the event of default. For instance, here is a simplistic draft of a security clause: “The Borrower shall grant the Lender a first-ranking legal mortgage security interest over Plot 123, Lekki, Lagos, until the full repayment of the loan”. It is important to note that the creation of security interests typically involves more extensive documentation, e.g. deed of legal mortgage, advance payment bond, deed of guarantee, deed of charge, etc.

Certain security documentation may require perfection and/or registration with relevant authorities, such as the Corporate Affairs Commission (CAC) or the Lands Registry of States, ensuring enforceability under Nigerian law. Typically, a clearly stated procedure for security enforcement protects the financier’s right to recoup its investments without protracted legal disputes.

Covenants Clause

Covenants are commitments made by the developer to fulfill certain obligations or maintain specific standards during the project development. A financier may use covenants to maintain closer oversight of projects, or in the case of institutional financiers, use covenants as part of a broader risk management strategy for projects. In Nigeria, covenants may include requirements to maintain adequate insurance coverage for the project, compliance with necessary regulatory approvals, such as building permits or environmental impact assessments, and provision of regular project reports to the financier. For example, a covenant could state: “The borrower shall procure public liability insurance and all risks insurance for the Project, with the lender named as the first loss payee.”

For financiers, covenants serve as safeguards that promote accountability and reduce exposure to risks arising from non-compliance or mismanagement by the developer. It is also important to consider the nuanced transaction dynamics of a project and include covenants that address these. Breach of these covenants can trigger default provisions, enabling financiers to enforce corrective actions before a situation deteriorates.

Subordination Clauses

Subordination clauses establish the priority of claims among multiple financiers, ensuring that senior secured lenders have priority over junior lenders in the event of default. For example: “The claims of the primary lender shall rank in priority to the claims of any subordinated lender with respect to the borrower’s assets.”

In Nigeria, where real estate projects often involve multiple layers of financing, these clauses are critical for protecting the interests of primary financiers. Institutional lenders, such as banks, frequently insist on subordination clauses to safeguard the priority of their claims, particularly when other secondary financiers are involved in projects. Individual financiers may also benefit by securing agreements that prioritize their repayment, reducing the risk of financial loss if the project underperforms. For large-scale projects involving multiple lenders, it is considered best practice for senior and junior lenders to enter into an inter-creditor deed arrangement, that is then administered by a trustee who preserves the competing interests of all lenders in accordance with the terms of the inter-creditor deed.

Force Majeure and Default Clause

Force majeure clauses address unforeseeable events that could hinder the developer’s ability to meet completion and/or financial obligations. Force majeure events may vary and the events should be clearly spelt out as agreed between the parties. For example: “In the event of a force majeure occurrence, the borrower shall notify the lender within five days, and repayment obligations shall be suspended for the duration of the event.”

Default clauses, on the other hand, outline the remedies available to financiers if the developer fails to meet repayment terms. These may include providing a cure period window for the default, enforcing the security interest over the collateral, appointing a receiver/manager, or demanding immediate repayment of outstanding amounts. For instance: “If the borrower defaults on repayment for more than 30 days, the lender reserves the right to appoint a receiver to manage the project and recover outstanding debts.”

For financiers, these clauses provide mechanisms to address risks associated with volatile economic environments. Financiers may use force majeure clauses to accommodate genuine delays without compromising long-term repayment prospects. Institutional financiers, with larger exposures, often rely on these clauses to initiate structured processes, that maintain the project’s commercial viability and minimises losses.

Step-In Rights

Step-in rights allow financiers to intervene in project management if the developer fails to meet key milestones or financial obligations. This clause could state: “In the event of a material breach by the borrower, the lender shall have the right to step in and take over project management until the breach is remedied.”

In Nigeria, step-in rights are particularly valuable for institutional financiers funding large-scale developments, such as residential estates or commercial complexes. These rights enable financiers to protect their investments by ensuring that the project is completed or managed efficiently, where there is a high potential of project failure. Individual financiers can also enforce step-in rights to safeguard smaller projects by appointing trusted third parties to oversee completion.

Regulatory Compliance Clause

Given Nigeria’s regulatory landscape, financiers should include clauses that mandate compliance with all applicable laws and regulations. For example: “The borrower shall obtain all necessary permits and approvals, including land title registration and building plan approvals, as a condition precedent to disbursement.”

For financiers, these clauses minimize exposure to legal and regulatory risks, such as project shutdowns due to non-compliance. Institutional financiers often conduct due diligence to verify compliance before disbursements, while individual financiers may rely on advisors to ensure that the developer meets all requirements. Consequences for non-compliance such as suspension of funding, acceleration of repayment, or indemnities, further protect financiers from potential liabilities.

By incorporating these clauses into transaction documentation, both individual and institutional financiers can safeguard their investments, manage risks, and contribute to the success of real estate projects.

This article is only intended to provide general information on the subject matter and does not by itself create a client/attorney relationship between readers and Hamu Legal or serve as legal advice. 

We are available to provide specialist legal advice on the readers’ specific circumstances when they arise. For further enquiries, please contact our Real Estate team at petero@hamulegal.com or team@hamulegal.com.