Posted by Peter Foskett, Partner
Development agreements – a key clause for landowners to ensure compliance
As a landowner, when you enter into a contract with a developer – whether it is an option agreement, promotion agreement, land development agreement or a hybrid of these – you do so in the expectation that they will largely fulfil their obligations without the need to go to law to enforce them. But what if they do not?
Keeping the developer ‘honest’
There is often a ‘rounding off of edges’ by developers: not quite doing everything as per the contract, but close enough to render the cost of litigation disproportionate to the seriousness of the breach.
Your expectation follows the general attitude that we all honour the contracts we make. It is when we realise that perhaps we entered into a contract that is bad for our financial interests that we begin to look at ways of not fulfilling the contract. It is also then that the threat of litigation to enforce those obligations becomes more prescient. But how can landowners use the terms of their contact to maximise that threat of litigation?
The most effective way is to pass to the developer the onus to commence litigation. They, rather than you, need to weigh up the chances of winning and the risk of consequential costs against the benefit of keeping the contract alive.
Passing the onus to commence litigation to the developer
An example is contained in all property contracts, namely “the landowner will only transfer legal title in the land at the end of the transaction and following payment of the monies due to the landowner”. If the landowner refuses to transfer legal title, the buyer must go to law and persuade a court to make an order (which is one in the court’s discretion) that the contract must be completed.
In development contracts, there is though a more proportionate and timely way for you to pass the onus to commence litigation to the developer.
You can do so by inserting into the contract unilateral break rights in your favour should the developer fail to perform specified obligations by specified dates. The more objective the criteria is, the more effectively will this approach work. Typically those obligations relate to the principal provisions and would include:
- submitting a planning strategy to you for approval by a particular date
- submitting a planning application to you for approval by a particular date
- subsequently submitting the approved planning application to the local planning authority by a particular date
- lodging a planning appeal against a refusal (deemed or actual) of planning permission or the grant of an unsatisfactory planning permission within a particular period of time
- a failure to pay any further sums due to you during the lifetime of the contract to keep it in force
- not promoting other competing land.
A developer will resist such provisions, but a way to mitigate their potential hardship to the developer is to require that you give the developer a period of time to remedy the breach before the landowner can exercise the break right. This too will often be in your interests as normally you would prefer to see the contract fulfilled than to terminate it and find a new party with whom to enter into a replacement contract.
What do you do if the developer breaches contract?
Such an approach means that all you have to do is to serve a preliminary notice relating to the breach and, if needs be, a subsequent break notice should the breach not be remedied.
It is then for the developer to go to law to argue that the landowner was not entitled to serve the break notice and consequently the contract is still subsisting. The more objective the criteria triggering the break right, the harder it will be for the developer to make that argument. This is a much simpler and cheaper remedy for you than having to commence litigation or threaten to do so. Consequently it is a much more effective tool for keeping the developer ‘honest’.
For advice on drafting contracts to protect your interests when dealing with developers, contact our expert Real Estate team on:
0800 182 2438 Email us