Adapting the agreements can help property developers
Helps mitigate risk
There has been recent media attention on the way property development contracts are structured following the cancellation of a number of Agreements for Sale and Purchase by the developers of a project in Tawa, just north of Wellington. Reportedly, the developers said that without being able to cancel the existing agreements, the companies establishing the development would have otherwise faced liquidation and the development would have been halted.
In this article we look at how agreements can be adapted to suit the specific characteristics of a property development and how they can help mitigate the risks (and costs) to developers. As well, we address some of the questions you should ask to determine where the risks and burdens of the development will fall.
Who will own the land during the development?
When undertaking a property development, you do not necessarily need to purchase the underlying land before on-selling to prospective buyers. Instead, you could make your purchase of the underlying land conditional on the development proceeding and the sections or houses being on-sold. This can limit the risk you will be unable to complete the development (because, for example, you cannot obtain the necessary consents for the development) after you have purchased the land.
Any of your sale agreements that on-sell properties in the development must account for the fact that the sale of the land to you will need to go ahead first or contemporaneously. This holds true for any agreements or events on which the development is dependent. If there is anything that must happen before you proceed with the development then your sale agreements should be conditional on that thing happening.
Who is responsible for the resource consent?
You can add clauses to any agreement to specify whether it is you, the owner of the underlying land or even the eventual buyer of a property in the development who is responsible for obtaining the necessary approvals and consents for developing the property. It is sensible to make both your land purchase and sale agreements conditional on the necessary approvals and consents being obtained. This will help ensure you are not bound to complete an unlawful development.
You also should consider who should approve the conditions imposed on any approvals or consent. To avoid onerous conditions being placed on you, you may want to specify that, before the agreements become unconditional, you must approve the terms and conditions of the resource consent or other relevant approvals.
The development takes longer than expected?
Under rules in the Resource Management Act 1991, all agreements entered into prior to the deposit of the survey plan are automatically conditional on the survey plan being deposited. Buyers are also entitled to cancel their agreement:
- Within 14 days of the agreement being signed by all parties, or
- Two years after the date the resource consent was granted or one year after the date of the agreement (whichever is later) if you have ‘not made reasonable progress towards submitting a survey plan’ or have ‘not deposited the survey plan within a reasonable time.’
Aside from these rules, you can build clauses into your agreements that provide a shorter timeframe for the deposit of the survey plan or that allow you to cancel the agreements if the development is not completed within a specific timeframe. Known as ‘sunset clauses’, these can operate for either party’s benefit depending on the wording. This was the type of clause relied upon by the developers in the Tawa situation when they were unable to complete the development without facing liquidation.
If you are considering including a sunset clause in your agreements, remember that any delay on your part in completing the development must be justified. This is because you will be obliged to do all things ‘reasonably necessary’ to complete the development before the due date of the sunset clause.
Changes to the survey plans or building specification?
If you are making sales early on in your development, it is possible that the survey plans for the land or specifications of the build will change as the development proceeds. To address this, in your sales agreements you should include some direction on how such changes will be dealt with. For example, you could include a clause that provides that the buyers will have no claim for compensation where the area of their land is slightly less than expected following the final survey.
We can help you identify risks
The issues discussed above are only some of the things to consider when structuring the agreements for your development. Whether any of the above will be useful in your development depends how far in the process you are and whether there is still opportunity to spread the risk of the development. By involving us early in the development process, we can identify risks which might arise during the development process and tailor the agreements to best manage and mitigate those risks.