Why development monitoring?
Commercial properties are increasingly being acquired or leased by investors, tenants, or owner occupiers ‘buying off-plan’. Such arrangements give rise to significant risks that can prove a minefield for the uninitiated. Here, we consider the importance of development monitoring in safeguarding the interests of future investors, or occupiers, of a new development.
It may seem surprising, but a future tenant or purchaser ‘buying off-plan’ has no direct control over the works being undertaken, despite having important interests and obligations. In a typical building project, the building contractor and design team are all contracted to a single client, the developer, who has total control over the design and construction. It could be argued that this is appropriate; after all, it is the developer who carries most of the risk of the development. However, a developer will have a very different set of values and criteria for a project, which are often at odds with those of an investor or occupier.
A developer will generally seek to maximise their profit for a given scheme through a ‘lowest cost’ approach to designing and constructing a building, aiming just to meet statutory standards only. This may have implications in terms of inherent defects or early costly replacement of major building components. The suitability of a new building for its intended use may not be adequately considered, giving rise to additional occupation or fit-out costs. Or a building that simply does not work. In short, a developer is inclined to take a short-term view, focusing on minimising the capital cost of the building. If left unchecked, this can give rise to poor performance, increased expenditure and disruption to investors and tenants.
The lack of contractual relationship with the project team means that, without an appropriate agreement in place, there is no contractual recourse against those responsible for inadequate design or construction. In the event of any building defects further down the line, the development company may no longer exist. An investor or occupier might find themselves having to meet the cost of repairing building defects in addition to any consequential losses with the reduced possibility of recovering these from the developer or the design and construction team. As we have seen over the past decade, such costs can be significant and once on record, can adversely affect a building’s history.
So what measures can investors, tenants and owner occupiers take to reduce these risks during the design and construction of a new building? The way to protect the interests of these parties is the ‘development agreement’. In this context, this will usually be an agreement for sale and purchase, or agreement to lease. Although this cannot grant direct power over the project team, it should contain obligations on the developer. These include providing the benefit of all contractual obligations of the design and building contract team, a right of review and approval of design changes, stipulating standards and particular requirements. The development agreement provides the means to manage the risks involved and ensuring a building, over which there would otherwise be no control, meets expectations. An agreement that does not incorporate suitable technical standards and procedural requirements leaves the interested parties exposed.
In order for the development agreement to be effective in helping safeguard the end user or investor’s interests, an experienced development monitoring building surveyor (“the surveyor”) should be appointed at a very early stage of the project. The surveyor performs a vital role in assuring that the project risks can be effectively managed.
Initially, this will involve a full review of the client’s requirements. Each project is different; it is the role of the surveyor to ask questions so the particular needs and concerns of their client are met. This might be centred on how they expect the building to perform, the level of finish required and the cost of maintaining the completed building. Most importantly expectations need to be understood.
The project design and specification, along with any specialist reports are then reviewed against these requirements, as well as other relevant criteria. The draft development agreement should have the necessary technical and practical provisions to protect the client and enable the surveyor to adequately perform their duties. Building contracts, consultant appointments, collateral warranties and sub contracts are also checked to see whether these offer an appropriate degree of protection. Collectively, this is known as the technical due diligence stage.
The initial audit of the building project is presented as a report identifying key technical risks and providing advice on these. For example, the surveyor might report that the design life of a roof is limited to 15 years and the need for full replacement will arise at that point. The overarching aim is that a client is fully aware of these risks while they are still in a position to address them. If risks are identified early enough in the project they can be removed or otherwise managed at least cost.
The surveyor’s role continues throughout the construction (the ‘monitoring phase’) through a process of site visits, attending project control group meetings and analysis of any variations and other contractual notices. The surveyor will identify and, where possible, mitigate any risks on behalf of the client to assure that quality, programme and budgetary agreements and standards are maintained. The end result should be a development that meets an occupier or investor’s requirements, procured in an efficient manner that mitigates as much risk as possible.
As New Zealand begins to experience strong growth in the construction and property sectors, greater use of development agreements as a means of acquiring commercial property is anticipated, particularly in the Canterbury region following recent events. Development agreements enable a client to acquire a tailored property without taking on the direct risks of developing the property themselves. When undertaken properly, the development agreement provides a means of acquiring property that places risk and responsibility with those best placed to deal with it. Clients will especially need to be aware of achieving quality and value from their completed buildings in a highly stimulated and potentially overstretched construction market.
If you are contemplating buying or leasing commercial property off the plans, the message is make sure you get robust technical advice. Your surveyor is every bit as important as your solicitor in these matters and needs to be brought on board early for maximum influence and thus benefit. Development monitoring can never guarantee your building will be free from problems, but it will ensure your risks are significantly reduced.