The term ‘development agreement’ covers a wide variety of agreements between developers, landowners, purchasers, tenants and funders. They are often complex, and each will be tailored to the specific details of the commercial terms agreed and the specifics of each development.
Having clear legal advice before you proceed with a development project is essential to ensure the successful running of the development and its future. At Harper James our commercial property solicitors understand that no two developments are the same and will ensure that your objectives are met in a pragmatic and commercial way.
Contents:
How does a development agreement work?
In the main, a development agreement outlines a developer’s obligations to carry out or procure construction works on behalf of another party. Usually the agreement involves a transfer or grant of annterest in the property being developed, such as a sale or a lease.
Types of development agreement
Agreement for Lease/Pre Let Agreement
This is an agreement where a tenant agrees to lease a property once construction is complete. These agreements specify construction standards and how rent will be calculated (often based on the final floor area).
Example: A supermarket chain agrees to lease a retail space in a new shopping centre before it is built.
Standalone development agreement
This is an agreement where a landowner hires a developer to complete a project, either covering costs themselves or allowing the developer to finance and later own the property (by way of a long lease or purchase of freehold) once the development is complete. Example: A landowner contracts a developer to build apartments, which the developer will later sell for profit.
Forward funding agreement/development funding agreement
In this type of agreement, a purchaser finances construction costs as the project progresses. T. Often there will be an agreement for lease/pre let with a tenant, but they can also be speculative where the development is not pre-let.
The developer may accept a lower profit in exchange for reduced risk, compared to financing and completing the development independently before selling it. In this scenario, the purchaser assumes that risk in return for a lower purchase price than if they had waited for the development to be completed and leased before committing to buy.In this type of arrangement the developer will:
- immediately transfer its interest in the property to the purchaser;
- agree to build the development to an agreed specification;
- have rights to draw down money from the purchaser to pay for building costs;.
- receive a profit from the purchaser once any leases with tenants have been completed.
Speculative funding agreement
Similar to a forward funding agreement, but without a pre-arranged tenant or buyer. The purchaser assumes higher risk that the completed development may remain empty or not sell.
Forward purchase agreement
This agreement outlines a deal where a developer agrees to sell a completed development to a purchaser, often at an early stage—sometimes even before planning approval is secured or construction begins. In many cases, the purchaser is an institutional investor, such as a pension fund. When this happens, the agreement is typically paired with pre-let agreements between the developer and prospective tenants.
Under this arrangement, the purchase price is usually paid upon completion of the development or, in some cases, after it has been leased. The developer covers the construction costs upfront, either using its own funds or securing financing, which is later repaid from the sale proceeds.
Other documents relating to development agreements
As well as the development agreement there may be a whole host of other agreements that sit alongside the development agreement. These can include:
- Agreements for lease/pre let agreements with prospective tenants who will take leases once the development has been completed
- A building contract with the contractor carrying out the development for the developer (including the full suite of appointments between the contractor, its consultants and its subcontractors and any collateral warranties to be procured from them on behalf of the purchaser/lender/tenants)
- Finance agreements/facility letters with any lenders providing finance for the development/purchase
- Property transfer deeds
- Planning agreements
Key terms to include in your development agreement
Timings
Timings are an important feature of any development agreement. There may be conditions precedent that need to be met such as the obtaining of planning permissions, satisfactory surveys, financial viability tests or securing pre lets. These should be drafted carefully to ensure there is certainty as to what is required and by when.
Thought should be given to a target date and long stop date and whether the developer will be permitted extensions of time and if so, in what circumstances.
Payment terms
The payment terms in the agreement will depend on what type of agreement you are entering into e.g. a forward funding agreement will set out the price payable by the purchaser which could simply be a fixed price or could be reflective of the value of the development on completion based on capitalising the rents payable by tenants.
Defining the work that is to be carried out
The development agreement should set out the standard of quality for the development so that all parties are clear as to what is to be delivered. There will be a host of documents annexed to the agreement setting out a detailed specification for the development and obligations on the developer to comply with statutes, planning permissions, recognised building practice etc. There should also be provisions allowing the non-developing party to inspect and monitor the works as they progress.
The development agreement will also set out how the practical completion date is dealt with. Practical completion confirms the completion of the development thus triggering payments/completion of the sale/letting of the developed property so there should be no ambiguity between the parties as to how and when practical completion occurs.
Termination clause
The non-developing party to a development agreement will insist on a right to terminate in certain circumstances e.g.:
- The developer becoming insolvent
- The developer committing a serious breach that is not remedied after a default notice has been served under the agreement
- The developer committing a material breach of the agreement
The right to terminate may include the right to walk away or terminate the obligation to advance monies (if that party already has an interest in the property) as well as terminating any further obligations on the developer to complete the development so that another developer can be found.
The non-developing party may also insist on step in rights. Step in rights allow the building contract between the developer and building contractor to be assigned together with all the professional appointments – these may be included in the collateral warranties given to the non-developing party or via third party rights granted to it in the building contract/professional appointments.
Defects liability period
A defects liability period is a set period of time after a development project has completed during which the developer will be liable for remedying any defects which become apparent at their own expense. The inclusion of this clause will benefit both parties. For the non-developing party, they can request that the developer returns and remedies the defect. For the developer, it is usually cheaper for them to remedy any defects themselves rather than being asked to pay the non-developing party’s losses in arranging for someone else to remedy it (and save time and cost rather than referring matters to dispute resolution/litigation.
Collateral Warranties
The non-developing parties in a development agreement will not be a party to the building contract between the developer and the building contractor (or the appointments of the professional team e.g. architects, structural engineers). To minimise their risk of having to remedy any defects in the development the non-developing parties may insist on collateral warranties. The development agreement should include an obligation for the developer to secure these warranties. Ideally, an agreed-upon form of warranty should be prepared in advance and attached to both the development agreement and the building contract.
The non-developing parties will need to carry out due diligence on the building contractor and the contract between the building contractor and the developer. This due diligence should extend to any sub-contractors involved in design work and to consultants (often referred to as the professional team) responsible for design and management tasks. It’s important to remember that the value of a collateral warranty depends on the strength of the underlying contract it is tied to—such as the building contract, sub-contracts, or professional appointments.
Summary
Development agreements help structure property projects, reducing legal risks and ensuring financial security. They are, however, quite complex in nature and need careful drafting. Our commercial property solicitors at Harper James can help developers, landowners, investors, and tenants navigate even the most challenging developments with our specialist expertise in this area.
Need legal advice? Contact us today to discuss your development project.
