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 places an obligation on a developer to carry out or procure construction works on behalf of another party. Usually there is a transfer or grant of a property interest in the property being developed relating to this obligation.
Types of development agreement
Agreement for Lease/Pre Let Agreement
This is an agreement where a tenant agrees to take a lease of property on completion of its development. These agreements will usually include details/specifications on the manner in which the development should be built, what the property should look like and the mechanisms for determining the rent (which will usually be linked to the final floor area as built).
Standalone development agreement
This is an agreement where a landowner contracts with a developer to carry out a development project, either at the expense of the developer or the landowner.
If the developer is funding the development at its own expense, then the developer is usually granted a long lease of the property or there is an agreement to transfer the freehold interest of the property to the developer following completion of the development.
Forward funding agreement/development funding agreement
In this type of agreement, the purchaser provides the finance to cover all of the costs of the development as it progresses. 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 settle for less profit for taking on less risk than if the developer had developed the property with its own money and then sold the completed development. The purchaser in this scenario takes on that risk for a lower purchase price than if they had waited for the development to be built and let before committing to buy it.
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
This type of agreement is the same as a forward funding agreement but without the development being pre-let by the time the purchaser enters into the agreement. The purchaser takes on a higher risk funding the construction without knowing there is a tenant already signed up to take a lease on completion.
Forward purchase agreement
This is an agreement where a developer agrees to sell the completed development to a purchaser and the parties enter into the contract at an early stage. This may even be before planning has been secured or the development works have started. Often the purchaser will be an institutional investor, such as a pension fund, in which case this will normally be done in conjunction with the putting in place of pre-let agreements between the developer and prospective tenants.
In this type of agreement, the purchase price is paid on completion of the development or sometimes not until it is let, with the developer funding the construction costs itself (whether through its own funds or using finance which will be 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 in collateral warranties and an obligation on the developer to procure them should be included in the development agreement (and an agreed form of warranty should be agreed in advance and annexed to the development agreement and building contract.
The non-developing parties will need to carry out due diligence on the building contractor and the building contract between the building contractor and the developer. Due diligence should also be carried out on any sub-contracts for sub-contractors undertaking design and the appointments of any consultants (often referred to as the professional team e.g., architects, structural engineers) undertaking design and/or management functions. The strength of any collateral warranty will only be as good as the underlying contract they are parasitic upon (e.g the building contract, sub-contract, appointments).
Summary
At Harper James we understand that property development can be complex. Our commercial property solicitors can provide expert advice on the most challenging of developments and can assist property developers, land owners and tenants.
