EM Law are experts in advising clients on development agreements. Our lead construction lawyer is Anna Rabin who has extensive experience in advising clients on a wide range of construction law matters.
In broad terms, a development agreement is a document that regulates the relationship between property developers, funding institutions and tenants. There are various types of development agreements and the choice of which type to use will depend upon the nature and complexity of the particular transaction. A landowner may wish to engage a developer under a development agreement for a number of reasons, including the owner lacking the expertise, experience or capacity to carry out the development itself, or because the owner does not wish to deal with management and administration responsibilities.
The different types of development agreements are:
Agreement for lease
This type of agreement is used where a tenant commits to taking a lease of a property once the developer has built the property according to the agreement. The mechanism for settling the initial rent is set out in the agreement but is usually linked to the floor area built.
Forward purchase agreement
Many developers aim to sell a finished development and move onto the next project quickly. A typical buyer of such a development would be an institutional investor, also know as a ‘fund’. A forward purchase agreement sets out the terms on which the development will be sold by the developer to the fund. Often the developer and the purchasing fund will exchange contracts for the sale of the completed development at an early stage in the process, for example when building works are partially complete. The developer will usually fund construction from its own resources or from a short-term loan which will be repaid when they receive the sale proceeds.
Forward funding agreement
With a forward funding agreement, a purchaser provides funds to cover the costs of all the development as it progresses. The forward funding agreement is the core document that governs the relationship between the borrower and the developer. It contains parameters around how the development will proceed and the mechanics of how and when payments will be made to the developer. Many agreements will also cover the profit payment element of the development.
Speculative funding agreement
A speculative funding agreement is, in essence, the same as a forward funding agreement. The difference between the two is that with a speculative agreement, the development is not necessarily pre-let at the time the fund enters into the agreement. The funding institution here is taking more a risk, not knowing if the development will be occupied by a tenant.
Stand-alone development agreement
A standard, stand-alone development agreement is usually put in place where a landowner already owns a piece of land and brings in a developer to carry out a project on that land. The construction may be at the landowner’s or the developer’s expense.
Clearly every development agreement will be tailored to every individual project. However, there are a number of clauses which will generally be found in all development agreements.
In every type of development agreement, the developer will covenant to produce a development for its customer. A developer may be under an absolute obligation to develop the property in accordance with the plans and specification for the development or they may be obliged to use reasonable care and skill. Alternatively, the covenant may state that the developer will use best endeavours or all reasonable endeavours. Every development agreement should also contain provisions to ensure the quality of the development.
In every type of development agreement there should also be a timetable for the development of the project, including a longstop date for completing it. Provisions allowing the purchaser/tenant to terminate the agreement should also be present. This provision will usually be triggered if the developer is in serious breach, fails to meet a longstop date, or becomes insolvent.
Development agreements can be complex documents to draft. For any questions you may have concerning development agreements contact Anna Rabin.
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