Development Agreements: Balancing risk and flexibility

Development Agreements are the cornerstone of many real estate projects, providing a framework for delivery, obligations, and financial arrangements. However, they are rarely simple.  

Those negotiating them must allocate risk fairly, while allowing enough flexibility to adapt to changing circumstances throughout the project. Getting this balance right is critical for both landowners and developers.  

In this article, we explore two key principles that underpin successful development agreements: risk allocation and flexibility.

Why does someone have to bear the responsibility for risk?

Every development project brings risks:  planning, funding, construction, and market conditions can all derail timelines and budgets.  A well-drafted Development Agreement should answer one fundamental question: who bears which risk?

Types of risks to consider

• Planning risk - Securing planning permission is often the first hurdle.  If permission is refused or delayed, who should absorb the cost?  Developers typically take on the planning risk, but landowners may insist on minimum land value guarantees or termination rights if planning fails. Some agreements include longstop dates for planning approval, giving landowners an exit if the project does not progress
• Funding risk - Development requires significant capital investment.  If a developer cannot secure funding, the development project stalls.  Agreements should specify what the repercussions are if this happens.  Can the landowner terminate?  Who keeps the deposit?  Who owns the intellectual property in the preparatory documents?  Landowners often seek evidence of funding before committing, while developers may want to negotiate staged payments, to ease cash flow
• Construction risk - Delays and escalating costs are unfortunately very common in development projects.  The parties need to establish:  who pays if costs escalate?  Will the developer absorb any overruns, or can they pass some costs to the landowner?  The Development Agreement should be crafted in such a way as to address these risks.  Some agreements include caps on recoverable costs or require developers to maintain insurance to a specified level, to cover unforeseen events
• Market risk – The property market is famously sensitive to economic pressures.  Values fluctuate.  If the market dips, developers may want to renegotiate terms.  Landowners, however, want certainty.  Mechanisms like minimum guaranteed payments, or profit-sharing, can help balance the interests of each party.  For example, a landowner might accept a lower upfront payment in exchange for an overage payment.

Practical tips for allocating risk

• Be explicit:  Vague clauses create uncertainty.  Define obligations, timelines, and remedies clearly
• Use conditionality wisely: Conditions precedent (e.g., planning approval) protect parties, but should not be so onerous that they stall progress
• Stress-test the agreement:  Ask those “what if?” questions (as lawyers, we love doing this!).  What if planning is delayed, costs rise, or the market falls?  Build your answers into the Agreement.

Why flexibility is essential if you’re involved in a development project?

While certainty is important, rigidity can kill a project.  Market conditions, planning requirements, and supply chain issues can change overnight.  Development Agreements are more resilient where they include provision for reasonable adjustment.  

Where does flexibility help?

• Timelines - Fixed deadlines can be unrealistic, particularly where matters are outside the parties’ control.   Consider including provisions to extend deadlines for force majeure or planning delays.
• Financial terms – Flexibility in financial arrangements can keep projects viable if costs rise or values fall.  For example: overage.  Development Agreements can also include “market review” clauses triggered by significant economic changes
• Design and specification - Developers often need scope to adapt designs to meet planning conditions or market demand. Agreements should allow changes within agreed parameters, such as maintaining minimum quality standards while permitting minor layout adjustments
• Exit Strategies - Both parties benefit from clear termination rights.  Flexibility avoids disputes if circumstances make completion impossible.  For example, a developer may negotiate a right to terminate if planning permission is refused after multiple appeals.

Building flexibility without losing certainty

• Set boundaries:  Flexibility should not mean vague.  Define limits on time extensions and place caps or parameters on financial adjustments
• Include review mechanisms:  Scheduled reviews during the project allow parties to address issues collaboratively
• How to vary the Agreement: Agree how variations will be approved.  Have a clear process.  Who decides, what notice is required, and who bears the associated costs?
• Balance commercial objectives:  Flexibility should protect viability without undermining the landowner’s financial expectations.

Conclusion

Development Agreements are frameworks in which the parties set out how they plan to collaborate.  By allocating risk clearly and building in sensible flexibility, the parties can reduce disputes and keep projects on track.  This approach is essential in an uncertain market.