Look Before You Leap – What you need to know about development agreements

Look before you leap

We’re on the verge of the first building boom since the lull that followed the GFC: In the clamour for building projects, it will be even more important to take the time to get things right.  Michael Gray considers how to effectively manage the technical risks when procuring new property under a development agreement.

Procuring new premises through a development agreement presents an attractive way to acquiring a new building without many of the risks and potential pitfalls of procuring a building project directly:  It offers a tailor made solution to a client’s property requirements, whilst leaving the job and hassle of designing and building it to an experienced provider.

But there are risks involved in handing over control for what can be a significant investment or commitment to another party. If you don’t address these risks before you sign on the dotted line, the success of your project may rest on the diligence and good will of the developer and the absence of unforeseen events, of which there can be many.  Developers will often have quite different priorities than a purchaser / tenant, as some have learned to their detriment when things go awry.

The key to a successful project lies in three parts. First and foremost is the legal agreement between the purchaser and tenant.  Quite often this will be an agreement for sale or lease to transfer an interest in the property once it is complete.  This document is vital as it forms the basis of what will be provided, when and to what quality.  While the building contract is for the developer and contractor, in many ways, the agreement is a quasi-building contract, spliced to a conveyance.  Purchasers / tenants will want certainty of design, cost, timing and quality.  The approach should be to identify those aspects that are important or present risk to the purchaser / tenant and address these in the agreement.  There is no ‘one size fits all’ solution to this:  Each client will have different requirements and priorities.

The other two parts fall to a technical representative; firstly to audit the design and contract documents for compliance with the appropriate standards and purchaser / tenant’s requirements and identify design or contract risks to be addressed.  This is followed up on site with regular monitoring to provide a check on building quality and compliance.  The technical representative’s role can be undertaken by anyone with a good knowledge of building standards, construction law, reinstatement and, importantly, building defects.  Although they do not have a monopoly on such expertise, typically a chartered  or a registered building surveyor has this rather unique skill set.

The authority of the technical representative is derived from the agreement:  He or she should have a position akin to a contract administrator, with powers to request variations (almost inevitably required), opening up works where defects are suspected and a say on whether practical completion (often the trigger for the legal transaction) is reached.  An agreement that doesn’t provide the necessary authority leaves the technical representative powerless, able only to report, but not address concerns.

So what does a ‘good’ agreement look like?  From a technical perspective, there are a number of important elements that are beyond detailed consideration in this article.  However, some of the key technical matters that should be addressed include:

  • Annexation of the purchaser / tenant’s requirements
  • Inclusion of quality standards (code compliance alone should not be relied on)
  • Stipulating a completion date (or the means to calculate it) and implications for failure to achieve this
  • A mechanism for variations and how cost and time implications are assessed
  • The floor area to be achieved and mechanisms for dealing with any discrepancies
  • Provisions for guarantees and warranties to be provided
  • Provisions to enable the technical representative to monitor the works, including site access, attendance at meetings and notification of key events / stages

A well-drafted agreement along with good technical representation can considerably reduce the risks of acquiring an interest in a property that has yet to be built.    Such agreements distribute risk to those best placed to deal with it; many of the obligations put on a developer reflect those owed to the developer under the building contract and consultant appointments.  There is often a perception that this fetters the developer somehow.  In reality, developers should welcome a client with clear requirements and an informed approach to the development and its risks.

Prendos have published A Guide on Technical Matters to be Addressed in an Agreement for Sale or Lease, intended to advise and inform solicitors and their clients on how to minimise their risk.  Refer  www.prendos.co.nz for further details.

 

Michael Gray is a Chartered Building surveyor specialising in technical due diligence at Prendos.

 

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