Development Agreements:  What are the key provisions?

Development Agreements involve complex and detailed drafting to ensure that they reflect the requirements of everyone involved, and that they disclose any relative allocations of risk. This article highlights some of the common clauses that you should spend time considering and negotiating.

This is a brief summary of some of the key points that may occur for you to consider – each Development Agreement will have its own requirements and risk factors, although certain aspects are common to all such agreements. 

Obligations on the developer to develop!

This may seem obvious, but there are many nuances. For example:

• Is the developer under an absolute obligation to develop the property? Or to use only its “reasonable endeavours” a much lower level of obligation.
• Will the developer accept an obligation to use reasonable care and skill in carrying out the development? This may seem very basic but accepting this will mean that the developer is under an option to manage the project and the project team conscientiously and diligently.

Design

The development agreement may have a pre-approved specification and detailed drawings attached to it, which will govern the exact nature of the project to be delivered.

There is then the question of the extent to which this can be varied to a small or large degree, and what process is required if this is needed.

Other development agreements may have numerous design elements to be dealt with after exchange of the development agreement – for example if the agreement is also conditional on obtaining planning consent.

Appropriate drafting is needed in this situation to ensure that the fund or tenant has sufficient input, and also has appropriate recourse against all parties involved, in any aspect of the design process.

Quality

You should expect to see an obligation on the developer to procure that the development works are carried out in a ‘good and workmanlike manner’.

This is a surprisingly undefined term but is usually understood to mean that the works must be carried out with reasonable care and skill, to a standard and competence expected of a contractor experienced in that field.

It is not a guarantee of total perfection, but an obligation to provide an adequate and acceptable standard of work. Certain materials may be prohibited and there may be an obligation to use ‘new’ materials – although in recent times sustainability concerns may mean that this is not an absolute requirement.

Warranties

An absolute essential is that the Development Agreement sets out the position on what warranties will be provided and to whom. Funds and tenants will wish to ensure that their position is protected in the case of building contractor insolvency, and they should also consider whether warranties should be provided by key sub-contractors.  

Warranties give funds and tenants the ability to take action against the building contractor and its professional team directly, if they are in breach of their obligations. Early consideration of warranty package requirements is essential, as these discussions will involve not only the main parties, but also the full professional team. Most funds will also insist on their having full ‘step in rights’ to ensure that they can ‘step’ into the shoes of the developer and ensure that the development gets completed, if for example the developer becomes insolvent mid-way through the project.

Practical completion

The practical completion date is a date of key importance for everyone involved. It is usually the trigger for payments/completion of the sale and transfer of the relevant land/grant of the relevant leases, and it will also trigger the developer’s obligation to pay the building contractor.

Practical completion means the date when the project is completed and ready to be used, apart from minor defects and snagging items (to be dealt with subsequently by the building contractor). Funds and tenants will of course wish to ensure that practical completion is not certified earlier than it should be, and as well as having the ability to attend the relevant inspections, will insist on having the ability to for their own consultants to attend practical completion inspections. The provision of warranties by the parties issuing the certificate of practical completion is also essential.

Timings

Agreements will need both a Target Date and a Long Stop Date.

• A Target Date is the date that the parties agree is the point at which the project will be complete. The developer will most likely build in some time for delays in the project. Other parties should try and tie this date up as much as possible so that they can get it occupied by a tenant and start receiving a rent income (fund). The development agreement will usually allow for extensions of time if circumstances occur beyond the parties control (Force Majeure events) but ideally a realistic and deliverable date is chosen at the start.
• A Long Stop Date is the date after which the fund or tenant can terminate the development agreement and walk away, if the developer has not delivered the project. This is usually a very much longer period than the Target Date, the remedy being so draconian. The party wishing to exercise the right may need to give the developer notice and time to make good first, but ultimately this allows the agreement to be terminated in its entirely.

Developer’s profit

Depending on the type of Development Agreement, there may need to be a mechanism to allow the calculation of the developer’s profit. This is always a clause that funds and developers expect to spend many hours in negotiations on, and getting this to work to the mutual satisfaction of everyone with competing interests, can prove challenging.

Other matters to consider

A whole list of other clauses is also needed to make a Development Agreement work. Some are standard clauses – such as an obligation on the developer to comply with statutory requirements and delver appropriate documents on completion – such as confirmation of compliance with planning consents and Building Regulations Approvals.

Others are bespoke, to the specific project in question - for example dealing with detailed design obligations, obligations to obtain planning consents and requirements to deal with remediation of historic contamination on site.

Each Development Agreement will have a life of its own, depending on the nature of the project, the relative risk appetite of the parties and the type of development agreement that has been chosen.

In our next article, we look at balancing risk and flexibility with Development Agreements.