You’ve acquired the site, found a great tenant, agreed finance and are desperate to get building. Before you can do that, there are some major legal hurdles to jump over: not least, drafting the development agreement, appointing your consultants and agreeing the building contract. And that’s where the trouble can often start. What should you be aware of and why does it never seem to be that easy?
Simple is as simple does
The annoying thing is that in theory it should all be relatively simple. Your goal is to try to pass all of the risk placed on you in the development agreement down onto the professional team and contractor. You also need to ensure that there is sufficient contractual security to satisfy your bank’s lending requirements. The problem is that you may well be unable to persuade members of your professional team, the contractor or any of its subbies to take on all of that burden. The shortfall between what you are required to procure and what you are able to pass down is euphemistically referred to as developer’s risk. However, apart from requiring everyone in your team to review the development agreement and ensure that they don’t put you in breach, there are some useful tips to bear in mind.
Your main concern is time…
Most development agreements will contain long-stop dates: if you haven’t finished the construction by a certain date (often two or three times the build period), the prospective tenant can walk away leaving you significantly out of pocket. The risk is exacerbated by the fact that building contracts contain clauses entitling the contractor to extensions of time in certain specified circumstances: for example, for bad weather or for changes in specification.
There are two key types of protection for the developer:
- Limit the circumstances in which the contractor can get an extension.
- More importantly, ensure that the provisions in both the development agreement and building contract are exactly the same. In other words: if the contractor gets an extension under the building contract, you get a mirror extension under the development agreement.
The one catch to this is that you should expect to bear the risk where extensions of time are granted to the contractor which are your fault (for example, if you are late providing information). But that’s not actually too bad: you still have the protection of the long-stop period and an added incentive to keep a weather eye on the project.
…actually it might be money…
The two issues can often be two sides of the same coin. In addition to the cost consequences of delay, you also need to protect yourself against uncertainty in construction costs overrunning. Again, there are some key protections to look for:
- Agree a very detailed specification with the tenant.
- Ensure that the contractor sticks to it by covenanting (assuming you are adopting a design and build procurement route) that the contractor’s proposals comply with the specification in all respects and making the contractor bear the risk for any differences.
- Don’t allow any changes to the specification unless instructed by the tenant and ensure that the development agreement provides for you to be compensated for the time and cost consequences of those changes.
…or build quality
As mentioned in the previous section, the specification is key. You will need expert help from your consultants to ensure that it is sufficiently detailed and adequately costed and that certificates are only issued for work that complies with it. You also need to ensure that your design team has an excellent working relationship with the tenant’s monitoring surveyor. Although the surveyor should not be allowed formally to fetter your consultants’ discretion, it is better to have their informal agreement to each certificate throughout the build process.
And that’s not all
It is also helpful to use the payment mechanism in the building contract as a means of ensuring the production of other documents – collateral warranties to the tenant and bank, the health and safety file and the operations and maintenance manual – in good time. Handy safeguards include ensuring that no payments can be made for work done by design subcontractors who have not first provided the relevant warranties and making sure that no certificate of practical completion can be issued until a complete suite of relevant documents has been provided.
And to think that this article just considered the construction aspects. Our property colleagues could flag up an entirely different set of issues.