When a landowner already owns the land to be developed and appoints a developer to carry out the scheme on its behalf, a development agreement is employed. The agreement is the contract that will outline the obligations of the project’s stakeholders. It can be fairly complicated and must be adjusted to the specific project that will be undertaken. In this article, development agreements, we take a look at the process involved and the options available to you.
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There are several types of development agreement, and these include:
An agreement for lease
An agreement for lease (also known as a pre-let agreement) is used when a tenant promises to take a lease of the property once the developer has constructed it according to the terms of the agreement. In the agreement, the method for paying the initial rent is outlined. It is typically related to the constructed floor space.
It is doubtful that the tenant will contribute to the financing of the development, but the agreement will have many similarities to a forward funding agreement.
Forward purchase agreement
Many developers try to promptly sell a completed project and move on to the next one. A typical purchaser of this type of property would be an institutional investor, commonly known as a “fund.” A forward purchase agreement specifies the conditions under which the developer will sell the development to the fund.
Frequently, the developer and the purchasing fund will exchange contracts for the sale of a completed development at an early stage of the process, such as while construction is just partially complete. Typically, the developer will pay for construction with its own funds or a short-term loan that will be repaid with the sale proceeds.
Forward funding agreement
In a forward funding agreement, as opposed to a forward purchase agreement, the purchaser/fund provides finances to cover all the costs of the development as it progresses (including invoices from building contractors, architect’s fees, etc.).
Development funding agreement is another name for a forward funding agreement. A forward funding arrangement is frequently also referred to as a forward purchase agreement.
Under this arrangement, the developer may accept a lower profit (but a lower risk) than if the property had been developed with its own money and then sold as an investment. The fund assumes some risk but anticipates a lower purchase price and a higher yield than if it had waited until the development was constructed and leased before committing to purchase it.
In a typical forward finance agreement, the developer transfers freehold ownership to the fund immediately (who are then reassured that they are advancing money to be spent enhancing their own land).
The developer also has the right to withdraw funds from the fund to cover construction expenses. Typically, the fund pays the expenses against monthly invoices up to an agreed-upon maximum commitment. The developer is liable for any costs exceeding the maximum commitment and also agrees to construct the development in a specific manner.
When the lease is granted, the developer receives a profit from the fund.
Stand alone development agreement
Typically, a conventional, stand-alone development agreement is created when a landowner who already owns a parcel of land hires a developer to carry out a project on that parcel. The construction may be paid for by either the landowner or the developer.
Speculative Funding agreement
This arrangement is identical to a Forward funding agreement, except that the development is not pre-leased when the fund enters the deal. The fund assumes a greater risk by financing the construction without knowledge of a tenant.
Are the various types of development agreements completely different?
Each development agreement will be suited to its respective project. Nevertheless, there are a number of provisions that are common to all development agreements.
In every sort of development agreement, the developer agrees to create a development for the client. A developer may be required to develop the land in line with the development’s plans and specifications, or they may be required to use reasonable care and skill.
Alternately, the covenant may stipulate that the developer will make all reasonable or best efforts. Every development agreement should also include provisions to guarantee the development’s quality.
Every sort of development agreement should also include a schedule for the project’s progress, including a completion deadline. There should also be provisions permitting the buyer/tenant to terminate the arrangement. This clause is typically activated if the developer commits a material breach, misses a longstop date, or becomes insolvent.
How we can help
We have a proven track-record of drafting development agreements. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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How to Contact Our Construction Solicitors
It is important for you to be well informed about the issues and possible implications of a development agreement. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Construction solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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