A lender's guide to vesting certificates

When the UK’s furlough scheme finally closed at the end of September, there were plenty of dire predictions about a tidal wave of companies going bust.

Construction, which had accounted for one in six of all company insolvencies in the preceding 12 months – more than any other industry – was widely tipped to bear the brunt of the impact.

The ending of the Government’s flagship business safety net means struggling construction firms can no longer seek refuge in the suspended animation of furlough.

Time will tell just how many of these weak firms will come a cropper. But lenders and developers are rightly concerned by the heightened insolvency risk across the supply chain.

As surging material prices and rising labour costs eat into contractors’ already slim margins, the apparent health of the construction industry can mask the extreme fragility of some builders.

Prudent lenders have therefore ramped up their due diligence on their borrowers’ supply chains, both during the initial underwriting process and before releasing further tranches of funds amid construction.

This caution has also sparked a huge uptick in the use of vesting certificates. Before the pandemic, these documents — which show the formal ownership of a set of building materials — were a relative rarity. However, the dizzying pace of material cost inflation and fears over supply chain fragility have thrust them centre stage.

The trouble is, while many lenders’ loan management teams now routinely request vesting certificates from their borrowers, not all understand them.

From scribbled notes to invoices and receipts, the reality is that not all vesting certificates are worth the paper they’re written on. So how do you tell the vest from the rest?

A vesting certificate is not a receipt

It’s much more than that — it’s proof of ownership. While a receipt from a supplier merely confirms that payment has been made, a vesting certificate proves that ownership of a clearly defined quantity of building materials has been transferred to the buyer.

The buyer — ie the owner — may be the developer themselves, or a contractor buying and holding the materials on the developer’s behalf. Either way, the vesting certificate gives legal protection in the event the materials supplier, or the contractor, goes bust. If a receiver is called in, they will not be able to seize materials that are correctly identified as the property of the developer.

A picture is worth a thousand words 

Photographic evidence is just as important as the vesting certificate itself, as it shows that the materials actually exist. Whether they are stored in the contractor’s yard or, as is more common, in the manufacturer or wholesaler’s warehouse, the developer should insist that a photo is taken of the materials, showing them clearly labelled and inventoried.

Splendid isolation 

It’s not enough for the materials to be ‘put aside’ by the supplier. If they’re being stored in a warehouse, they need to be kept completely separate from other stock. The photo should confirm this.

Clarity over complexity

Vesting certificates need not be long or onerous to complete, and there are several useful templates available online. But they do need to be absolutely explicit about who owns the materials, what payments they have made for them, and when. They should also confirm that the materials have been adequately insured and make clear who is responsible for insuring them.

When it comes to contracts, talk to an expert

The construction supply chain is underpinned by an intricate web of contracts, which set out who is responsible for what and when. Vesting certificates are a small piece of this puzzle and, while they can provide reassurance that materials have been paid for and will be protected if a supplier goes bust, developers and their lenders who want a fuller picture of their exposure to insolvency risk should seek advice from a surveyor experienced in project monitoring.

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