Financing a Joint Development Project: How to Protect the Landowner While Giving the Developer Bankable Security

"The developer will obtain project financing."

In a joint development agreement, that sentence can hide the most important land-control negotiation in the transaction.

A bank does not finance a project because the JDA says the developer may borrow. It looks at the borrower, the land, the development rights, project contracts, cash flow, security and what happens if the project fails.

The developer therefore needs a financing structure a lender can accept. The landowner needs to understand exactly what rights it is being asked to give the lender.

The objective is not to prevent bankable security. It is to define a security envelope that finances the development without giving away more control over the land than the transaction requires.

Design the financing structure before the developer becomes dependent on it

A common sequencing problem is to sign the JDA first and discuss security only after a lender issues its term sheet.

By then, the developer may need the loan to keep the project alive. The landowner may be faced with a package of lender requirements it never agreed to, and both parties lose negotiating flexibility.

If third-party financing is part of the business model, the JDA should identify the broad financing permissions at the outset.

Who is actually borrowing the money?

The borrower may be the developer itself, a special-purpose development company or a jointly owned project company. Our guide to JDA vs JV company covers how that choice interacts with the wider structure.

That choice matters because the borrower can only offer security over rights and assets that it actually has, subject to the applicable legal and contractual requirements.

If the project company does not own the land, a lender will want to understand what rights it has to develop, access and complete the project and how those rights survive a developer default.

The JDA should therefore coordinate the borrower structure with the land rights rather than treating the company and land documents as separate exercises.

Can the land itself be charged?

The landowner may be asked to allow a registered charge or another land-security arrangement in favour of the project financier.

That is a major commercial decision.

Current JKPTG materials confirm that charges and the consent requirements affecting land are formal parts of the Peninsular Malaysia land-administration system. Restrictions in interest, existing charges and other interests can affect what the proprietor is able to grant.

A JDA therefore cannot make land security available simply by stating that the developer may finance the project. The title position, existing security, required consents and the actual security instrument must be checked.

Sabah and Sarawak have their own land-law regimes, so the appropriate land-security analysis also depends on location.

Existing landowner financing comes first in the conversation

A development site may already be charged to the landowner's bank.

If so, the project financier may ask for priority, refinancing, consent, intercreditor arrangements or another solution.

The JDA should not assume the existing charge can simply be ignored or that the landowner will refinance on whatever terms the developer later requires.

Before signing, the parties should identify the existing financing position and agree who bears the cost and risk of obtaining any necessary consent, discharge or restructuring.

Land security is only one part of a project security package

Depending on the borrower and project, a financier may also consider security over company assets, project contracts, receivables, accounts, insurance proceeds or other rights, together with corporate or personal guarantees where commercially agreed.

SSM's current Companies Act materials include the registration framework for charges created by companies. That corporate-security layer is separate from the land-registration layer.

The JDA should therefore identify which categories of security are permitted and which require specific landowner consent, instead of approving "all security required by the financier".

A caveat is not the same thing as a charge

Parties sometimes use "caveat" and "security" as though they mean the same thing.

They do not.

A caveat can protect a claimed interest from inconsistent land dealings in the circumstances permitted by land law. A registered charge is a distinct security arrangement with its own legal consequences.

The developer or lender should not assume that a JDA automatically creates a caveatable interest, and the landowner should not assume that allowing a caveat is equivalent to agreeing a financing charge.

The rights created by the transaction and the appropriate land instrument have to be analysed separately.

What is a lender direct agreement?

A lender may want a direct contractual relationship with the landowner rather than relying entirely on the developer's JDA rights.

A direct agreement can address matters such as:

• notice to the lender before the landowner terminates the JDA for developer default;

• a period for the lender to cure certain defaults;

• the ability to nominate or support a replacement developer in agreed circumstances;

• confirmation of the landowner's obligations while the lender is exercising agreed cure rights;

• how project documents and approvals are dealt with; and

• what happens to the lender's rights after repayment, termination or completion.

The direct agreement should complement the JDA, not silently amend the landowner's commercial deal.

Should the lender have cure rights before the JDA is terminated?

From a lender's perspective, immediate termination can destroy the project it financed.

It may therefore seek notice and time to cure a developer default before the landowner can terminate.

That can be commercially reasonable, but the cure period should reflect the type of default.

A missed payment may be curable quickly. Insolvency, abandonment or a serious regulatory failure may require a different response. Our dedicated guide to developer delay, abandonment and insolvency covers this scenario from the landowner's perspective in full.

The landowner should avoid an open-ended cure right that prevents it from protecting the land while the project deteriorates.

Step-in rights need a defined purpose and end point

A lender may also want the ability to step in or arrange for a replacement developer so the project can be completed rather than abandoned.

The JDA and direct agreement should define:

• what events trigger step-in;

• who can exercise the right;

• how long the step-in period lasts;

• what obligations must continue during it;

• what qualifications or approvals a replacement developer must have;

• whether the landowner has reasonable approval rights over the replacement; and

• what happens if no workable replacement is found.

Step-in should preserve a viable project, not create an indefinite right for a lender to control the site.

What happens if the financier enforces?

The parties should understand the enforcement scenario before agreeing the security package.

If the lender holds security over the borrower's company assets, that may affect the developer differently from a lender holding agreed land security. If land security is involved, the landowner needs specific advice on the rights and consequences created by that instrument.

The JDA should also consider whether the landowner's entitlement has already accrued, whether it ranks behind particular financing obligations under the commercial waterfall, and what happens to project documents, approvals and works if enforcement disrupts the developer's role.

Do not let the security package swallow the landowner's economics

A landowner may agree to support project financing because the development cannot proceed without it.

That does not mean every project receipt or asset should be available to the lender without regard to the landowner's agreed position.

The JDA should coordinate:

• the landowner's entitlement;

• permitted financing costs;

• distribution priorities;

• the lender's account controls;

• any minimum payments or unit entitlement; and

• the effect of enforcement or refinancing.

If the landowner is economically subordinated to the financier for a period, that should be explicit and priced into the bargain rather than discovered from the finance documents later. Our dedicated guide to landowner entitlement under a JDA covers how this priority interacts with the entitlement formula in full.

Security release is part of the deal, not an administrative afterthought

A security package needs a clear exit.

The parties should identify when land security, company charges, assignments, caveats or other security must be released or withdrawn.

Possible triggers include repayment, refinancing, completion, a particular project milestone, termination where the secured obligations have been settled, or another agreed event.

The documents should also allocate who prepares and pays for the release documents and what happens if the lender is slow to complete the discharge after the secured obligations have ended.

If the project involves regulated housing, purchaser-money rules need separate attention

A lender and the JDA parties may want control over project receivables and accounts.

Where the project falls within a regulated housing-development framework, the applicable Housing Development Account and purchaser-money requirements must be considered separately. Our dedicated guide to the Housing Development Act inside a JDA covers this in full.

The finance documents and JDA should not assume all purchaser collections are ordinary project cash available for unrestricted assignment, security or distribution.

JDA financing checklist before signing

• Identify the intended borrower.

• Map the land and development rights the borrower actually has.

• Check existing title restrictions and landowner financing.

• Decide whether any land charge or other land security is permitted.

• List company/project security the developer may give without further landowner consent.

• Separate caveat rights from charge/security rights.

• Decide whether a lender direct agreement will be permitted.

• Define notice and cure periods before JDA termination.

• Set the conditions and time limit for lender step-in or replacement developer rights.

• Model enforcement consequences for the landowner and project.

• Coordinate the landowner's entitlement with financing priority and account controls.

• Define release and discharge mechanics from the beginning.

• Check any housing-development account or purchaser-money restrictions that apply.

Frequently asked questions

Can a developer charge land it does not own?

The developer cannot assume it can grant a land charge merely because it has signed a JDA. The proprietor, title position, required consents and the actual security structure have to be considered.

Can a landowner allow a project bank to take security without transferring the land?

A transaction may be structured with agreed land security while title remains with the landowner, but the legal effect and required consents depend on the title and instrument. Specific land-law advice is required.

What is a lender direct agreement?

It is a contract giving the lender agreed rights directly against or with the landowner, commonly around notice, cure and step-in before the JDA is terminated.

Should a lender have step-in rights?

They can preserve a viable financed project after developer default, but the scope, duration and replacement-developer conditions should be negotiated rather than left open-ended.

Is a caveat the same as financing security?

No. A caveat and a registered charge are different land-law mechanisms. The availability and effect of each depends on the rights and instrument involved.

When should project security be released?

The documents should define this in advance, commonly by reference to repayment, refinancing, project milestones, completion or another agreed end of the secured obligations.

For the wider commercial framework, see our joint development agreement guide.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

Legal That Works advises landowners and developers on financing, security, lender rights and risk allocation in joint development agreements.