10th July 2020
Unlike some sectors, development works on long timelines, and the life of many sites may span the emergence of coronavirus and the discovery and roll-out of a vaccine. Whilst Britain’s losses – human and economic - have been tragic the pandemic has thankfully not altered the underlying demographics of the population: it is growing so the need for building remains. In fact, the crisis has highlighted the need for good quality, specialist housing and shown our capability to house people when we put our minds to it. Commercial buildings will continue to need redevelopment and repurposing and the green economic revolution is gaining traction.
So how does the development sector weather the next three years? There is considerable valuation uncertainty as we wait to gauge the strength of the rebound and work out how to mitigate the effects of the downturn. The key to resolving these issues must be contractual flexibility.
In development options and contracts, the central tension is usually between the landowner’s need to achieve a minimum price and the developer’s need to buy land at profitable margins. With the pricing of the end product often being hard to predict, the temptation is for landowners to sit tight and wait for the market to stabilise; the danger being, of course, that this generates even greater instability.
Contract mechanisms are developing rapidly to navigate uncertainty in the medium-term. For instance, options can still incorporate minimum price mechanisms but the term may need to be extended to take account of infrastructure arrangements as well as planning. This allows developers to remove more pricing uncertainty from the deal before a sale is triggered. Valuation mechanisms can also be adapted to allow for wider comparables in term of geography and time so as to give more certainty on price.
Another innovation is allowing a developer and landowner to pause once planning permission has been granted, and even to grant developers a period of grace before they are required to buy under an option or to allow for more than one valuation process before the option/contract expires. Deductions remain an area where careful thought and planning tailored to the site has to take place.
With cashflow tight, the risk of forfeiting deposits and option fees is increasingly unacceptable. Tying the de-risking of the site in planning terms to the release of the deposit gives landowners certainty that the developer is contracting in earnest but does not punish developers where planning is not workable.
Where there is greater flexibility, parties clearly have to work together more collaboratively – which has led to good faith clauses rapidly becoming the norm. Under a good faith clause both parties agree to behave with honesty and transparency, taking into account the legitimate interests of the other party to the contract.
A perennial area of contention is the tension between landowners who want to deal with one particular developer on a timeline and with a developer’s need to transfer a site where the conditions are not favourable. Sub-sales may help those developers who cannot get landowners to agree an assignment clause. Timing a sub-sale where there are strict timelines in the purchase contract/option can, however, be challenging.
Although most sites are up and running again, new construction contracts must incorporate flexibility to allow contractors and employers to deal with ongoing COVID-19-related risks. Typically this includes limiting the ability to impose liquidated and ascertained damages (LADs) for virus-related delays or changes to build programmes generated by the need for social distancing. Where supply chains are disrupted by COVID-19-related delays, contracts need to allow for extra time and allocate the additional costs risk appropriately. Typically this involves allowing extra time to the contractor but preventing claims for additional costs.
Monitoring and management of materials stored, but un-used, is also essential. Since projects have hit delays, more materials remain on site and employers and contractors need to be clear on who is responsible for insuring them under the construction contract. They also need to make sure all necessary arrangements have been made to secure them and prevent them from deteriorating.
From a developer perspective definitions of insolvency should be made as wide as possible to allow for employers to terminate the move on where a contractor is unable to perform. Greater overall involvement in the sign-off process of build stages is more important to developers so that they are well-placed to step in on non-performing contracts.
The main risk in plot sales at present is lending offers being withdrawn between exchange and completion. Whilst some developers are able to offer contracts which are conditional upon mortgage/lending offers, these are rare. With house sales this can be dealt with by long contracts which have very generous completion dates or a simultaneous exchange and completion. Both can be nerve-jangling experiences for buyers but they do at least allow the parties to manage or break chains. On commercial plot sales, contracts with movable completion dates pegged to lending being available are increasingly the answer.
We are entering uncharted and choppy waters. Those involved in the development process who do not engage with new realities risk being left behind and overlooked as developers, contractors and landowners. The reality is that well-drafted and considered contracts allow all parties to move forward and engage with each other whilst opportunities are explored.
Please note: Nothing in this article constitutes legal advice and we are not liable for any reliance on the information provided. This is a rapidly changing subject, and whilst correct at the time of writing, circumstances may have changed since publication.
To find out more about anything covered in the article, or to discuss the potential impact of the coronavirus pandemic on the development sector, please contact Rebecca Dixon or another member of Thrings’ Development of Land team.