Property Development Agreements are, in general, legal instruments that govern the interactions between financing organisations, tenants, and property developers. The kind of development agreement used will depend on the specific transaction’s complexity and traits. There are several different forms of development agreements.
For a variety of reasons, such as not wanting to handle managerial and administrative duties or not having the knowledge, experience, or capacity to carry out the development themselves, a landowner may want to work with a developer under a development agreement. In this article, Property Development Agreements, we take a look at the process and mechanism involved.
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What are the fundamental points to include in a Property Development Agreement?
What is the required standard for quality in terms of design and construction? Here, a set of technical documents—or, at the at least, a “minimum requirements” document—would typically be agreed upon and added to the development agreement as a standard of what is needed. It is probable that the buyer will want to have the ability to examine and ‘sign off’ on the completed work, or at minimum, have some say or access to a third-party dispute resolution procedure in the event that they are not happy that the required quality has been fulfilled.
When is the development going to be ready? Will it be transferred all at once or in stages? Target dates and an ultimate longstop date for the completion of the work are typically specified. If there is a building contract with a third-party contractor, the developer would be prudent to make sure any ‘extensions of time’ granted under the build contract work their way back up into the dates stipulated under the development agreement. Developers will be keen to ensure that these dates can flex under unforeseen circumstances. In the event that the developer’s own construction team is unable to meet the deadline, pre-arranged (or liquidated) payments may be made to the buyer as compensation.
The price that must be paid for the construction work, as well as the basis for that price, should be specified in the development agreement. Generally, there will be a way for the buyer to ask the developer to make changes, as well as a way to figure out how cost increases would be covered. Even contracts for lump sum payments or fixed prices may frequently offer some financial relief for unanticipated risks, loss, and expenses related to unplanned delays in the work. The buyer should make sure there is enough contingency and understand under what conditions the price may change. Relief payments to the contractor that the developer is unable to collect from the buyer are not something it will want to be responsible for.
The development agreement will often address the correction of flaws as well as the terms of warranties and guarantees. The developer will probably wish to make sure that, at a certain date, its obligation for the construction work is eliminated, usually following the initial 12- or 24-month defect period following completion. That would probably only be acceptable to a buyer if it had ongoing legal recourse through a comprehensive and strong suite of collateral warranties against the builder, designers, and even subcontractors for any latent faults that could emerge.
What are the different forms of development agreements?
Standalone agreement
Under this arrangement, a landowner hires a developer to carry out a development project, either at the developer’s or the landowner’s expense.
If the developer is paying for the development on its own, the developer typically receives a long lease on the land or a transfer of the property’s freehold stake to the developer after the development is finished.
Speculative funding agreement
This kind of contract is similar to a forward funding agreement, but it doesn’t require the development to be pre-let at the time the buyer signs it. Funding the construction without being aware that a tenant has already agreed to take a lease upon completion puts the buyer at greater risk.
Forward funding agreement
Under this kind of arrangement, the buyer supplies the funding necessary to pay for any development-related expenses as they arise. Tenants will frequently have a lease or pre-let agreement, although they may also be speculative in cases where the development is not pre-let.
In exchange for assuming less risk, the developer can accept a lower profit than it would have if it had invested in the property’s development and then sold the finished product. In this case, the buyer assumes that risk in exchange for a lower purchase price than they would have if they had held off on purchasing until the development was completed and leased.
Forward purchase agreement
In this arrangement, the parties sign into an early-stage agreement whereby the developer commits to sell the completed development to a purchaser. This could even occur before the start of development activity or the acquisition of planning. Pre-let agreements between the developer and potential tenants are typically put in place in conjunction with the acquisition, which is frequently an institutional investor like a pension fund.
Under this kind of arrangement, the developer pays the construction costs directly (either with its own money or by taking out loans that are paid back from the sale proceeds), and the purchase price is paid when the development is finished, or occasionally not until it is leased.
Agreement for lease
In this arrangement, the tenant promises to take a lease on the land once development is finished. These agreements will typically contain information on how the development should be constructed, how the property should look, and how the rent will be determined (generally by tying it in with the number of finished floors as developed).
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Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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