United Kingdom

Forward Funding Case Study

“Having entered into 8 residential forward fund agreements in the past 4 years, we value the advice that the Aon Real Estate team have provided to ensure that our contracts contain the provisions necessary to ensure that our developer partners insurance arrangements meet both our needs and those of our lenders”.
Vice President, Acquisitions and Asset Management, Realstar Group

Forward Funding and Forward Purchase structures are commonly used in Real Estate transactions. They can present property insurance challenges which leave investors and banks exposed which, if not addressed, may in some cases hinder the later introduction of third-party funding. These challenges can generally be resolved providing investors engage effectively with their insurance broker before contracts are finalised.


Key takeaways

  • The investor must understand what they need from the Contract. Get the contract right and the insurance will flow out of it.
  • Investors should engage with their Insurance Broker during contract negotiation to ensure their interests are protected.
  • Investors must ensure, amongst other things, that they are a co-insured on the policy arranged by the Developer.
  • The introduction of bank debt at a later stage in the development must be factored into the insurance programme at the outset.
  • Investors should insist on the arrangement of project specific Delay in Start-Up insurance with the investor named as co-insured.


Forward Funding has become a main stay of Residential Development particularly in large scale regeneration projects where it plays a valuable role in accelerating housing delivery and facilitating faster letting rates during the early stages of regeneration whilst also de-risking infrastructure costs. The introduction of the Residential Property Developer tax could impact the popularity of these structures with Residential Developers, but Forward Funding is increasingly deployed across other asset classes, particularly the Logistics sector where competition for sites has enhanced its popularity.

The Insurance Challenges

In most Forward Funding deals, the developer is responsible for arranging insurance for the development up to the point of practical completion. The investor is, therefore, reliant on the developer securing insurance which indemnifies the investor in the event of a loss. It’s not uncommon for the draft of the Forward Funding agreement to inadequately address investor insurance requirements, potentially leading to a later problem in the event of damage, or when seeking third party funding for the project.

Investors should also ensure they are protected by a Delay in Start Up (DSU) insurance policy which offers protection if the payment of rent is delayed due to an insured peril. Such coverage must be procured at the commencement of the project as it will generally be unavailable if requested after that date, or separately from the project policy covering the works. It’s important to note this policy does not cover general project overruns caused by, for example, a shortage of skilled labour. Developers will often place responsibility for arranging the works cover on the Contractor, but Contractor arranged cover is very unlikely to provide any DSU coverage protection to the Investor.

Look ahead to take account of future funding requirements

If the investor intends to seek third party funding from a bank at a later stage, this must be factored into the insurance programme from day one as lenders will require an insurance policy that secures their interest in the property. There is typically no contractual obligation on the developer to procure insurance that meets lender requirements, so investors should proactively request it.

In addition to the protection it affords the investor, lenders will frequently insist on project specific DSU insurance (DSU) with the Forward Funder as a co-insured.

The requirements of banks are those typically found within the Loan Market Association (LMA) form of loan agreement and includes:

  • The bank will need to be composite insured on the policy.
  • The bank will need to be a first loss payee effectively designating the lender as a recipient of claims settlements in certain circumstances.
  • The bank will require a non-invalidation and non-vitiation clause which means that if one of the other insured parties invalidates or vitiates the insurance, this will not prejudice the rights of the lender to make a claim under the policy to the extent that they were not aware of vitiating act.
  • The bank will not want to have any duty of disclosure or any obligation to pay the premium under the policy.
  • Insurers must waive any rights of subrogation they may acquire against the bank.
  • The bank must be provided with 30 days-notice of policy cancellation.


To the extent that the investor’s ownership is by way of a long leasehold interest, it is also important to draft any post completion agreement for lease to ensure it meets the requirements of the investor during the operating phase of the building. Such matters include their status under the freeholder/ estate management company’s policy as co-insured, the apportionment of insurance proceeds in the event of inability to reinstate and the necessary flexibility to provide for the requirements of future debt providers.

The impact of getting it wrong

If the investors interests are not properly protected, their investment may be at risk if the development is adversely affected by an insurable event such as a fire or flood before practical completion. In this situation the Developer is contractually obliged to reinstate the works, but this can force Developers into insolvency where there’s a delay in paying the claim or where insurers refuse to settle the claim.

Failing to place obligations upon the developer to ensure that the project insurances meet the requirements of future lenders is a frequent source of frustration for investors. It’s a condition precedent of the LMA agreement that the borrower, in this case the Forward Funder, procures a letter from the placing insurance broker confirming compliance with the loan agreement. Brokers will not provide these letters if the insurances don’t comply, and we have seen cases where Lenders have pulled out of transactions due to non-compliance.

We’ve got it wrong…. is there a solution?

All too often deficiencies in the level of protection afforded to the investor only come to light in the event of a claim or when they are struggling to get a 3rd party debt provider involved.

At this point, there is very little that can be done to rectify the situation if the Forward Funding agreement did not adequately address the investors requirements and place appropriate obligations upon the developer. Historically it was occasionally possible to arrange a contingent insurance policy but there’s been a severe constriction in availability in recent years and it was never a clean or cost-effective way to solve the problem.

Lenders may be prepared to remove the requirement for DSU insurance based on the strength of the investor’s balance sheet but with DSU costing a fraction of the potentially significant sum that could be settled by insurers in the event of a loss, it’s hard to understand why this insurance isn’t purchased as a standard component of every development insurance programme.


Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN. Tel: 020 7623 5500.


Emma Vigus
Business Development Director, Aon, Real Estate Practice Group

Craig Taylor
Client Director - Real Estate Practice at Aon