Many include some or all of the following obligations on the developer:
-
to carry out the particular development in line with agreed plans and specifications;
-
to procure the provision of collateral warranties by the contractor and consultants to the purchaser/tenants and funder;
-
provisions which are designed to ensure the quality of the development;
-
letting obligations, which set out the minimum criteria for any prospective leases which the developer seeks to secure, perhaps with an agreed form of lease attached; and
-
a timetable for the development, including a longstop date for completing it.
Usually such agreements also contain:
-
inspection and monitoring rights for the purchaser/tenant; and
-
provisions entitling the purchaser/tenant to terminate the agreement if the developer is in serious breach, fails to meet a longstop date, or becomes insolvent.
In appropriate cases, the document will include a method for calculating the developer's profit - including a list of deductions and triggers for payment. The incorporation of a worked example can be very helpful, particularly where the calculation is complex.
Types of Development Agreement
Types of development agreement include:
-
a pre-let agreement or agreement for lease - where a tenant contracts to take a lease of the property on completion of the development;
-
a "stand alone" development agreement - where a landowner contracts with a developer to carry out a development project, either at the expense of the developer or at the expense of the landowner; and
-
a forward purchase agreement or a forward funding agreement - on which more detail below.
Forward Purchase Agreement
This is an agreement under which the developer agrees to sell the completed development to a purchaser, and the parties enter into the contract at an early stage, perhaps even before planning has been secured or before the development works have started. Often the purchaser will be an institutional investor, such as a pension fund, in which case this will normally be done in conjunction with the putting in place of a pre-let agreement between the developer and a prospective tenant.
Under a forward purchase agreement, the investor pays the price on completion of the development, with the developer funding the construction costs itself, either from its own resources or using loan finance which can be repaid out of the sale proceeds.
The forward purchase agreement will set out when title to the property will transfer to the purchaser - normally this will be on completion of the project. If a third party lender is funding the construction costs, they will normally hold a charge over the property which will only be released when the sale proceeds are available to redeem the loan. However even if the developer is funding the development out of its own capital, the developer will not wish to transfer title before completion to avoid the risk of spending money building on land which it does not own.
The agreement will also set out the price payable by the purchaser, which could simply be an agreed fixed figure, but is more likely to reflect the value of the development on completion based on capitalising the rents payable by the tenants.
Depending on the timing of the completion of the sale of the completed development, the lease to the tenant (in terms of the pre-let agreement) may be granted by the developer, or it may need to be granted by the investing purchaser post-completion, and the forward purchase agreement will also need to contain appropriate provisions to cover this.
Forward Funding Agreement
Lastly there is the forward funding agreement, where the purchaser also provides the finance to cover the development costs as the project moves forward. This is often where there is a pre-let agreement in place with a tenant, but could also be speculative where the development is not pre-let at the point when the forward funding agreement is entered into.
One point worth mentioning here is in relation to Land and Buildings Transaction Tax ("LBTT") (or Stamp Duty Land Tax - "SDLT" - in England and Wales). Typically a forward funding agreement will be set up as two contracts. The first (the land contract) will provide for the developer to transfer title to the land to the funding purchaser at the outset, before development commences. The second (the build agreement) will contain the development and other obligations. A significant LBTT/SDLT saving can be achieved by structuring the agreement in this way - as LBTT/SDLT will then only be chargeable on the land price and not also on the construction costs and developer profit. (That said, Revenue Scotland, who administer LBTT, do appear to be taking a slightly harder line on this than have HMRC, who administer SDLT.)
There are a number of other provisions typical of a forward funding agreement, but those are for another day.
Whilst the general provisions of development agreements are fairly well established, the devil is as always in the detail, and the terms of each agreement need to be very carefully drafted in order to ensure that the commercial terms negotiated between the parties are properly reflected in the documentation.
