The nature of industrial property, and its occupiers, is evolving rapidly. From a traditional manufacturing base, industrial property now includes e-commerce operators, sophisticated logistics and supply chain specialists, data centres and dark supermarkets among many other users. All industrial property operators increasingly use sophisticated technology in their day to day operations, and developers need to construct facilities which attract and accommodate these operators and their technology.
With such evolution comes a greater range of legal issues for developers to consider and manage. This includes greater construction risk, increased regulation in holding and selling such assets, energy security and capacity and greater environmental regulation.
As the first in a series of articles, we share key legal issues we have seen in the construction of such facilities and solutions for managing those issues and their associated risks.
As the demands of industrial property users change, so too has the way in which those buildings are built. With property owners and tenants driving innovation in the industrial sector, there is increased pressure on a developer to build space that is flexible and meets the customers’ needs as quickly and reliably as possible. As a result we are observing the following trends in risk allocation.
Faster procurement by using panel contracts
Panel contracts (also called relationship or master services arrangements) have long been used in the construction industry, but now have heightened relevance in the industrial sector due to the requirement to move quickly to deliver a new facility. A panel contract can be formed between any two companies and allows the terms and conditions to be pre-agreed, with just the commercial details (such as price, program and any other project specific details) to be finalised on a case by case basis.
By having a panel contract in place, we have seen industrial players able to get a consultant started on the design, have a builder on site commencing construction and key pieces of equipment ordered and on their way to site much faster than a competitor who is tendering terms and conditions from scratch for each package.
Panel contracts require the developer to put some effort in up front, in preparing and negotiating the standard terms and conditions with its likely consultants, builders and equipment suppliers. However the initial investment of time is rewarded with faster procurement. A panel contract can be put in place directly with a supplier of key equipment (for example high value or bespoke automated racking). While this will lead to efficiencies in the project timeline, the risks of the interface between the base building work and the supply and installation of the specialist equipment needs to be carefully considered and accounted for in the overall project risk allocation and documents.
Repurposing existing assets
The technology and equipment being used today to store, sort and select stock in a warehouse may only be fit for purpose for a limited number of years, and will need to be replaced by new and emerging technology. Consider the different type of warehouse that will be required where the mode of local delivery may include drones as well as vehicles. Ideally the developer needs to preserve the adaptability of the premises it is building to ensure that it can be more easily renovated, repurposed and adapted for a new use in the future. This can in part be achieved by ensuring that the builder’s value management powers are limited.
For example, this would arise where a builder’s scope involved building an industrial warehouse for a specific tenant, and it could value manage those works in any way possible, provided it still met the requirements of the first tenant who will occupy the warehouse. By being able to de-specify the warehouse to accommodate the initial tenant, the developer is not necessarily preserving the adaptability of the premises for future uses and tenants.
A different example is the use of non-specified building products (such as the recently revealed relatively extensive use of combustible cladding in residential and commercial towers in Australia), which are proposed by the builder. Unless the developer (or its project manager) is required to give consent to any substitution of materials, the builder may have the ability to use materials of a lesser quality (provided the substitute still complies with the National Construction Code) reducing the potential lifespan of the building.
Expansion and planning for Future Capacity
Today’s users increasingly require a flexible building footprint. If the site location is optimal from a supply chain perspective, it may prefer the ability to expand operations at its existing site rather than move to an entirely new site.
As a result, a developer may need to plan for such future additional capacity, including whether that should be provided for above the existing premises (to create multi-storey warehousing capability), adjacent (so that the existing premises expand into the new premises) or completely separate (which may be required for security, separation of competing customers or capacity/reliability of available utilities).
This is supported in the overall risk allocation by inclusion of potential future expansion within the design parameters for the industrial premises. Where a panel contract is used (refer above), there may be further programming benefits to appoint the same builder (including to avoid additional preliminaries or overhead) where multiple stages of a development are carried out at the same time.
With more complex projects, if not well managed, there is greater scope for later disputes.
The most prevalent ground for disputes in the construction of industrial buildings is the design and construction of the slab for the premises. Given the costly and timely consequences of attending to slab defects post completion of an industrial facility, there is a strong business case to allocate more funds into the engineering and specification of the slab (to avoid incurring the costs and delay of under-design).
Developers should also be aware of the application of limitation periods (especially in Victoria) on staged developments, where the ability to make claims against the builder for defective work expire within a fixed limitation period (10 years after the certificate of occupancy is granted). In a large multi-stages project, this could result on the limitation period for Stage One expiring before commencement of any remaining stages ten years later. If the stages are interdependent in any way this should be factored into the staging program.
As can be seen from the above, the range of legal issues to consider in the construction of industrial facilities is growing. Facilities are now often much more than a shed with racking. That evolution and innovation presents challenges as well as opportunities, and to address those challenges and make the most of those opportunities, developers need to make sure they are across these issues to best manage risk.
Watch out for the next article in our series which will cover the increased regulation in developing, holding and selling industrial assets, and strategies for cutting through that regulation.