Often a lot of time and money is spent carefully crafting Development Agreements, with the end users of the building in mind, but then limited time is spent considering the Building Contract. This results in risks that would otherwise reasonably be expected to be passed to the Contractor being with the Developer. The principles apply equally to Sale/Purchase Contracts and Agreements for Lease.
These risks relate to detailed criteria in relation to such issues as: achievement of practical completion; target areas; early access for the end user; making good defects and change control.
Construction documentation: how to transfer risk
There are three main ways in which these risks are addressed:
(1) Separate documentation
The Building Contract sits entirely separately in isolation to the property documentation. At best the risk of not meeting any of the Developer's obligations in the property documentation lies with the Developer. At worst, there are conflicting provisions within the construction documentation and the property documentation.
(2) Documentation handed over to professional team
The Contractor and Consultants are given a copy of the relevant Development Agreement and told to have regard to it. Even if this places a level of general obligation to comply with the Development Agreement, there may be uncertainty as to whether this general obligation can be enforced.
In many cases it is unreasonable to expect a Contractor/Consultant to wade their way through these, often extremely detailed, agreements and pick up what obligations they require to comply with. In the case of a large retail or office project there may be numerous tenants lined up for the completed development, each of whom will have entered into separate agreements for lease that will have their own specific requirements. Moreover, it will be detrimental to the project if there is uncertainty as to what the professional team is required to deliver.
(3) "Stepping down" the risk
Any detailed requirements are specifically "stepped-down" at the appropriate points in the Building Contract so that the Contractor can identify its obligations within the four corners of one document. By using this method the final documentation passed to the Contractor and Consultants is more meaningful, as it contains all the relevant criteria with which compliance is required for the completed project .
We generally recommend that option 3 is followed to ensure that the property and construction documentation are integrated and co-ordinated.
Examples of obligations that should be stepped down?
(a) Practical completion criteria
There is often a definition of practical completion in Development Agreements, given the importance of this milestone in triggering the date of entry, whereas many Building Contracts do not define the term practical completion at all. The risk is that a robust definition in a Development Agreement may leave the Developer exposed if this is not also mirrored in the Building Contract, with the result that practical completion is achieved under the Building Contract, but not under the associated Development Agreement. Commercially, this may allow a purchaser or tenant to withdraw from a transaction, delay completion or seek a reduction in price/rent.
If the Developer needs to deliver certain items (eg. drawings, collateral warranties or operational and maintenance manuals) before the Date of Entry, the Developer may want this to be a clear pre-condition to the Contractor achieving practical completion under the Building Contract.
(b) Target area provisions
Key to most commercial developments will be the anticipated internal areas that are to be achieved. Indeed, target areas will often be critical to the Development Appraisal. The Development Agreement will often contain price or rent calculations based upon the areas actually achieved. However, the vast majority of Building Contracts and Appointments will be silent on this issue.
We would generally recommend stepping down any target area requirements into both Consultant Appointments and Building Contracts (including, for example, obligations on the Consultants to design to the target areas and on the Contractor to achieve such areas) for two reasons: (i) to some extent this transfers the risk to the construction team, and provides the Developer with some recourse should anticipated target areas not be met and (ii) simply by airing the issue during the course of negotiating the construction documentation, it is remarkable how often this flags practical issues. On a number of occasions once this issue has been raised in relation to the construction documentation we have discovered that, for example, there can be discrepancies between the internal areas being marketed, and what is being designed by the architects.
(c) Early access
In terms of the Development Agreement the end user of the development may be entitled to early access to allow it, for example, to carry out any fit-out works. Whilst this is often an absolute right under the Development Agreements, under most standard form Building Contracts the Contractor's consent is required for such access. To avoid being "held hostage" by the Contractor in such circumstances it is important to make the end user's right to early access explicit by stepping down the right into the relevant part of the Building Contract.
(d) Making good defects
Most Development Agreements will contain detailed obligations on Contractors to make good defects, for example, outside working hours or within certain finite timescales for particular categories of defects. On the other hand, most Building Contracts only contain general provisions requiring that defects are made good within a reasonable time. Clearly, any prescriptive criteria in this regard should be stepped down.
(e) Change control
Often end users can instruct variations to the Developer's works. In many cases the Developer will be happy to instruct such variations provided that the cost is passed on to the end users of the building. It is therefore vital that the change control process under the Building Contract and Development Agreements are dovetailed. Unfortunately, in many instances there is a requirement to adhere to a strict change control process under the Development Agreement and this is not reflected in the Building Contract terms or, indeed, practice, resulting in a mismatch that leads to the Developer having to foot the bill for the costs of such variations.
Simple steps can be taken at the outset of a project to ensure that the construction suite of documentation is integrated and co-ordinated with the property suite of documentation, and vice versa, allowing a Developer to significantly de-risk its project. After all, often the parties best placed to manage such risks are those designing and constructing the project.
Even after these types of obligations are stepped down, it is worth carrying out a further step to ensure the construction team clearly understand the agreed terms and processes – there is little point in having the perfect contract if it is never operated in practice.