Without such a deed the lender will have little control over the day to day running of a property and this control will lie in the hands of a third party, which increases the risk to which a lender is exposed.
Managing agents will already owe a duty of care to the owner of the property under the management agreement. A duty of care deed is a way of extending that duty to the lender of the money. It can operate by the insertion of terms into the management agreement which impose extra obligations on it which are in favour of the lender but are not commonly documented in a deed entered into between the lender, the property owner and the managing agent.
This control is important to lenders because the suitability of tenants and their payment or non-payment of rent can affect the value of the building.
A duty of care deed should specify a bank account into which rent and other income is paid and when this should happen, and will control payments out of that account and payments to the lender. This could include instructions to hold the rental income on trust for the lender or having the account with the lender.
A duty of care deed should also control the level of professional indemnity cover kept up by the managing agent.
If the owner of the property defaults or becomes insolvent then the terms of a duty of care deed should provide that the managing agent will not be allowed to terminate the agreement or stop its services without informing the lender. Some duty of care deeds will simply require the managing agent to give, say 28 days, notice of its intention to terminate and others may provide the lender with step in rights or the ability to have a new management agreement entered into with them on the same terms and conditions.
The duty of care deed should also include rights for the lender to terminate the management agreement for material breach by the managing agent, default under the borrower’s facility agreement and insolvency of the management agent.
There should be provisions restricting the transfer of the managing agent's interest in the management agreement to allow the lender to maintain control and of who operates the property. Any new managing agent should have to enter into a duty of care deed on the same terms as the exiting agreement. Similarly the management agreement should not be amended without lender consent.