Real Estate Development Finance | The Need for Legal Advisory to Complete a Real Estate Project

Daeryun noted that, if the matter were pursued as an ordinary civil lawsuit, the scale of the disputed project, which reached the tens of billions of won, made it likely that substantial filing fees and lengthy litigation proceedings would arise.

Daeryun therefore developed a strategy of actively using the arbitration clause contained in the contract to pursue arbitration before the Korean Commercial Arbitration Board seeking confirmation of the contracts' validity.

In particular, by structuring the claim around confirmation of contractual validity, the firm organized the proceedings so as to keep the arbitration costs at a reasonable level and to guard against the risk of project delay caused by prolonged litigation.

Daeryun also closely reviewed the composition of arbitrator candidates and the case strategy from the early stages of the arbitration.

The firm submitted a brief so that arbitrators with extensive practical experience in real estate development structures and in determining contractual validity could be selected, and it submitted to the arbitral tribunal materials that systematically organized the background of the project, the contracting process, and the financing structure.

In particular, the firm analyzed the statements of the project participants and the documentary evidence obtained during the contract negotiations, specifically rebutting the counterparty's assertion of contractual defects and comprehensively explaining the parties' intentions at the time of contracting and the status of the project's progress.

As a result, the client company obtained a full favorable award holding that the joint development arrangement and the real estate purchase agreement were valid, and the development project, which had faced the risk of suspension, was able to proceed normally.

This matter is particularly significant in that, in a situation where the financing costs caused by project delay could amount to several hundred million won each month, the dispute was concluded relatively quickly through commercial arbitration rather than lengthy litigation.

As the legal uncertainty over contractual validity was resolved, the client company was able to proceed normally with the planned project financing, and the substantial risk of loss from project delay was also prevented in advance.

In this way, because the contractual structure, the financing method, and the rights and relationships among stakeholders are complexly intertwined in real estate development finance projects, it is most important to review legal risks in advance and, if a dispute arises, to prepare a prompt and strategic resolution.

In a real estate development finance structure, the contract serves as the basis for all legal rights and obligations.

Accordingly, not only the land purchase agreement but also the multiparty arrangements among the developer, the contractor, financial institutions, and the trust company must be organically concluded.

In particular, for a landowner joint development arrangement or a real estate trust agreement, the scope of each party's responsibilities and the profit distribution structure should be clearly defined in order to prevent management control disputes or conflicts over settlement amounts that may arise later.

When raising funds from financial institutions, careful design of the project financing structure is needed.

This entails not only the composition of the lender syndicate and review of the loan agreement but also advisory on the design of the collateral structure and the establishment of security interests.

In a project worth several hundred billion won, it is important to coordinate the interests among senior, mezzanine, and subordinated lenders and to establish a transparent fund execution structure through a cash management agreement (CMA).

A loan agreement includes provisions that impose significant responsibilities on the contractor and the developer, such as a completion guarantee covenant, debt assumption, and a funding supplement covenant.

In the course of real estate development finance, if the contractor's completion guarantee obligation is not performed, conflicts with the lender syndicate may intensify, so the legal binding force and the grounds for exemption under each provision should be closely analyzed from the contracting stage.

Comparison of Financing by Stage in Real Estate Development Finance

Because a bridge loan is secured against the uncertainty of the early stage of the project, its interest rate is high, and conversion into the main project financing is indispensable.

The main project financing is the process of raising large amounts of funds at the stage when the project becomes concrete.

Because the nature of the legal risk differs at each stage, a company should review with an attorney not only the financing terms but also whether the contract contains any abusive provisions.

During construction, disputes related to the construction contract, issues over the allocation of costs arising from design changes, and the risk of cancellation of permits and approvals may arise.

Through real estate development finance advisory, dispute factors should be reviewed in advance, and legal mechanisms to protect investors should be prepared.

If a dispute materializes, a prompt resolution should be sought through not only litigation but also arbitration and negotiation so that the project is not suspended.

Recently, due to rising interest rates and higher raw material prices, the number of distressed project financing sites has been increasing.

In this situation, a company may consider a workout or business restructuring.

Through legal advisory on the formation and operation of a creditors' council, a strategy is needed to normalize the project site or to dispose of distressed assets and guard against losses.

By analyzing trends in the real estate development finance market, measures to ease the interest burden through refinancing should also be explored.

Real Estate Development Finance Risk Checklist

• Are there any legal grounds for disqualification in the land purchase and the permit and approval process?
• Are the scope of the contractor's completion guarantee and the developer's debt guarantee under the loan agreement appropriate?
• Has the trust agreement clearly established the priority between the beneficiaries and the creditors?
• Are the lender syndicate's events of default (EOD) conditions in the event of project delay not excessive?
• Are damages provisions in place to address a pre-sale failure or completion delay?

Real estate development finance is a succession of significant decisions that may shape the course of a company.

A company's position must be represented not only in resolving legal issues at the fundraising stage but also in complex multiparty disputes, such as a claim for settlement amounts between a developer and a contractor.

Accordingly, collaboration with professionals who have extensive practical experience can increase a project's likelihood of success and is a reliable way to resolve legal uncertainty.

If real estate development finance becomes an issue in a company's important decision-making, you are welcome to arrange a 🔗real estate legal consultation.

A real estate development finance project may face numerous obstacles from the planning stage through final settlement.

In particular, unanticipated delays in permits and approvals or pressure from the lender syndicate to recover funds can pose a considerable threat to a company.

Because a failure to respond can lead to the collapse of the entire project, it is important to build a safeguard through thorough legal assistance from the early stages.

Our firm will present solutions for the various issues that may arise in the fields of real estate development and finance.

Our team of attorneys provides practical assistance toward the successful completion of a project, so if you are considering a related matter, you are welcome to seek answers through the one-stop response system of Daeryun Law Firm LLP.

Daeryun handles real estate development finance projects across the entire process, from planning through fund recovery and dispute response.