Development Agreements cover a wide range of legal arrangements, but the essence is an obligation on the developer to procure construction works on behalf of the other party. Typically, there will be a transfer of an interest in property which related to this obligation- for example a sale or lease.
In the Housebuilding sector reference to a Development Agreement is typically used to refer to the scenario where a developer has identified a site for redevelopment and enters into an agreement with a purchaser, such as a housing association or local authority to provide housing.
The developer will either own the site already or have an option to purchase it from a third party. The developer will agree terms to sell the site and build housing at the site. The purchaser will typically pay a purchase price for the site and a separate sum for the developer procuring design and construction works (including obtaining planning permission and other consents etc.). If the developer is also a main contractor, the development agreement may stipulate that upon sale of the site to the purchaser, the purchaser will enter into a pre-agreed form of building contract with the developer for the construction works. Alternatively, the development agreement will set out the developer's obligations in terms of the construction works with the expectation that the developer will step-down these obligations by entering into a building contract and professional team appointments.
Crucially the parties should agree on the contractual structure of the deal and also their roles at the outset. The developer could hold title to the land in a separate 'special purpose vehicle' (SPV) company but intend to carry out the works via its construction arm. If that is the case, the development agreement would likely require the developer to enter into a building contract (in specific terms) with the construction company and for such company to provide the usual warranties and guarantees for the purchaser (see further below).
Of course, each development agreement will be specific and we are used to drafting very bespoke arrangements for clients (no one development agreement is the same!) but the following "big four" are provisions we would expect to be included:
Quality: what is being designed and constructed and what is the standard expected? This is where a set of technical documents would usually be agreed and appended to the development agreement as a benchmark of what is required (or at least a "minimum requirements" document). The purchaser will likely want to be able to inspect and 'sign off' on the works at completion – or at least have some input or recourse to a third-party dispute resolution process where they are unsatisfied that the quality stipulated has been met.
Time: when will the housing be ready? Will it be handed over in phases or all at once? There will usually be target dates and an ultimate longstop date for the works to be completed. Developers will be keen to ensure these dates can flex under unforeseen circumstances and where there is a building contract with a third-party contractor, the developer would be wise to ensure any 'extensions of time'' granted under the build contract work their way back up into the dates stipulated under the development agreement. Where target dates are missed, there may be pre-determined (or liquidated) payments to compensate the purchaser, which the developer would ideally be able to recover these from its own construction team. If an ultimate longstop date is missed, what is the remedy for the purchaser, and is that adequate?
Cost: the development agreement may set out the price payable for the construction works and the basis of that price – lump sum/ remeasurable etc. There will usually be a mechanism to allow the purchaser to request that the developer make variations and a mechanism for determining how cost increases will be paid for. Even lump sum or fixed price contracts for works will often provide some financial relief for unforeseen risks or loss and expense associated with unforeseeable delays to the works. The purchaser should be clear in what circumstances the price can fluctuate and ensure it has adequate contingency. The developer will not want to be on the hook for relief payments to its contractor that it cannot recover from the purchaser.
Recourse: rectification of defects, provisions of warranties and guarantees will also usually be catered for in the development agreement. The developer will likely want to ensure its liability for the construction works is extinguished at a defined point – usually after the initial 12/24 months defects period after completion. That would likely only be acceptable to a purchaser where it had ongoing recourse for any latent defects that may arise against the builder and designers (and even sub-contractors) via a full and robust suite of collateral warranties.
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