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Step-in rights are contractual provisions that allow a third party to assume the rights and obligations of one contracting party when certain trigger events occur. In construction and property development, these rights serve as protective mechanisms, allowing funders, superior landlords, or other stakeholders to take control of projects when the original contracting party fails to perform or faces financial difficulties.
The mechanism operates through a tripartite contractual structure where the step-in party can literally "step into the shoes" of the defaulting party, either temporarily or permanently, to protect their commercial interests and ensure project continuity.
When a trigger event occurs, such as contractor default or insolvency, the step-in party receives notice and has a specified period to decide whether to exercise their rights. Upon making a formal step-in declaration, they assume the contractual position through novation or assignment, taking on both the rights and obligations of the original party.
This process requires careful co-ordination between the principal contract, the step-in agreement, and detailed notice and cure provisions that define precisely when and how the rights can be exercised.
Institutional lenders are the the most common beneficiaries of step-in rights, driven by regulatory capital requirements and risk management policies. Banks providing development finance, mezzanine lenders, and private equity investors typically demand comprehensive trigger event definitions, broad step-in powers, and minimal consent requirements to protect their financial exposure.
When multiple parties seek step-in rights, establishing clear hierarchy becomes essential. Senior debt typically takes precedence, followed by mezzanine finance in secondary positions, with equity investors holding subordinated rights and other stakeholders receiving limited or conditional arrangements.
Under direct step-in arrangements, the third party completely substitutes for the original contracting party, assuming full control and liability. While this provides immediate operational control, it also creates complete exposure to existing obligations and typically requires consent from the non-defaulting party.
Rather than taking over the contract directly, indirect step-in rights allow control through corporate mechanisms such as shareholding changes or management appointments. This approach maintains existing contractual relationships while providing effective control, making it less disruptive to ongoing operations.
These variations provide more nuanced intervention options. Conditional rights can only be exercised when specific conditions are met or after cure periods expire, offering a graduated approach that gives the original party opportunity to remedy defaults. Limited step-in rights restrict intervention to specific project aspects or circumstances, such as health and safety issues, reducing both disruption and liability exposure.
Trigger events require careful balance between protection and commercial reasonableness. Funders typically seek broad definitions covering insolvency, payment defaults, and performance failures, while contractors prefer narrow triggers with reasonable cure periods. Standard notice periods range from 10-30 days for step-in decisions and 5-20 business days for remedying defaults.
Liability allocation represents the most complex area, particularly regarding historical liabilities, existing defects, and warranty continuation. Key mitigation strategies include due diligence rights, liability caps, insurance requirements, and indemnity provisions.
Operational continuity demands attention to subcontractor novation, supply agreement continuation, TUPE implications, and permit transfers to ensure seamless project transition.
Draft bespoke step-in rights provisions - tailored to your specific project requirements and commercial arrangements
Negotiate step-in terms - with funders, contractors, and other stakeholders to achieve optimal risk allocation
Structure tripartite agreements - and documentation frameworks for complex multi-party developments
Advise on trigger events and enforcement - mechanisms to ensure your step-in rights are effective when needed
Conduct due diligence - before step-in right exercise to assess project viability and legal compliance
Manage step-in processes - including stakeholder coordination, regulatory compliance, and operational transition
Resolve step-in disputes - through negotiation, mediation, or litigation as required
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Solicitor - Construction & Engineering
Daniel is a Consultant.
He is a Construction & Engineering law specialist and covers the full span of construction matters across a range of sectors including private wealth, office, living, logistics, hospitality & leisure and energy &am...
