A Development Agreement Explained

So, you’ve got a plot of land, you’ve found a developer to build a property for you and you’re handed a development agreement – a very long development agreement!  What to do next…you need to make sure that the development agreement covers everything you need it to.

It is recommended that you always take independent legal advice on a development agreement as they are complex documents.  As a minimum, you should make sure that the agreement covers the following key areas:

1. A licence for the developer to come onto your land. The developer needs licence (consent) to come on to your land for the purposes of carrying out the development – without it, the developer would be trespassing.  You would want to ensure that the developer only remained on your land for the purposes of carrying out the development.
2. You may want to consider adding a provision in the agreement that the agreement is personal to the developer only i.e. the developer cannot assign its rights / obligations under the agreement to someone else.
3. An obligation on the developer to engage professionals and sub-contractors. You would want to check which professionals were appointed, what the terms of their appointments are, that there was an obligation on the developer to adhere to the appointments and to not change the appointment unless you agree. As a minimum, we would expect that an architect would be engaged to design the building, a structural engineer would be engaged to provide advice on the structure and for another professional to certify the property as ‘practically complete’ usually an employer’s agent.  There will usually also be sub-contractors who provide services such as cladding, steelwork, mechanical and engineering services etc.
4. An obligation on the developer to adhere to an agreed form of building contract. It would be usual for the form of building contract to be agreed and attached to the development agreement.  The building contract would usually follow a recognised industry standard format, like a JCT Design and Build Contract.  Again you would to want to check which building contractor was appointed, that there was an obligation on the developer to observe the terms of the building contract and to not change the building contract unless you agree.
5. An obligation on the developer to procure collateral warranties from the professional team and the sub-contractors. Collateral warranties provide you with cover after the work on site has finished.  You would expect warranties to last for 12 years.  You would want the ability to freely assign the benefit of the collateral warranties in the event that you wanted to sell the property.  The warranty should also oblige the relevant professional to have adequate professional indemnity insurance for the duration of the warranty.
6. An obligation on the developer to ensure that each member of the professional team grants you an irrevocable, non-exclusive, non-terminable royalty-free licence to copy and use any material prepared by the member of the professional team.
7. An obligation on the developer to carry out the works and conditions as to how the works are carried out. You need to think about timing and the standard of work.  The works should be carried out in a good and workmanlike manner, using good quality materials, in accordance with the agreed specification, in accordance with the necessary planning consent, building regulations and all applicable laws and in accordance with all relevant industry standards and codes of practice.
8. The option to make changes to the build if you choose. You would want the ability to deviate from the original specification if you fancy something else.  If you do want to change the specification, there should be a mechanism for you to request a variation and for the developer to respond to the variation request by letting you know the impact on price and the impact on the timescales.
9. An obligation on the developer to insure or procure insurance of the works and the building. You would expect that the developer would have standard All Risks insurance in place and insurance for re-instatement if an insured event occurred, like a fire or flood.  We would also expect the building contractor to have in place insurance in respect of death or injury to persons or loss / damage to property.  There should also be provisions for the professional team to have professional indemnity insurance.
10. A target date by which the works should be finished by. You need a date for the developer to work towards.  There should be an obligation on the developer to meet this date and consequences of missing the date.  This could include a provision for liquidated damages to be paid to compensate you for genuine losses incurred by the delay, for example, if you were building a house and you hand to extend your rental tenancy because the works were late, you would look to get some sort of reimbursement of the additional rent.
11. A long stop date by which you can pull out and terminate the agreement if the building isn’t finished. You may also want to think about other reasons which would allow you to terminate the agreement. the developer is in breach of the agreement or the developer suffers some sort of insolvency event
12. A clear payment strucure. It would be usual for the build to be paid for in instalments perhaps when certain pieces of work have been finished.  It would be quite common for an independent person to certify what work has been done and the cost of the work at that time.  You should also consider capping the total amount paid to the developer throughout the term of the build.
13. An ability to accompany the landlord’s representative when the property is to be inspected for the purposes of certifying practical completion. You would want a final say on whether the build was certified as complete or not.  You may also want to have the right to inspect the progress of the build while the works are ongoing.  You would also want a say on what went into any snagging list.
14. A list of conditions which must be met before practical completion is certified. You need to think about what things must be done before you are prepared to accept practical completion.  Conditions could include the provision of a health and safety file, the provision of an energy performance certificate, seeing proof from the Council that planning conditions and Building Regulations have been satisfied and ensuring that the property was wind, watertight, left clean and tidy and connected to all major services.
15. A defects liability period to allow for a period of time, after practical completion, in which the developer has to rectify defects in the build. We would expect this period to be for a minimum period of 12 months from practical completion. This would cover defects, shrinkages and faults in the works, aside from minor snagging items.
16. Finally, you would want the agreement to include dispute provisions. Although it would be hoped that all parties got on and co-operated throughout the build – disputes need to be covered!  The agreement should cover what happens in the event of a dispute, who is appointed to resolve the dispute and who pays the cost of resolving the dispute.

We hope that the above list does serve to give some guidance at what typical development agreements should contain but it is always wise to have a team of professionals around you.  BHW’s commercial property team have the requisite expertise to assist you with development agreements.