The recent high profile demolition of a new development shows the need for strong contractual protections in development agreements.
Readers have probably seen the commentary around the new build development at Darwin Green, Cambridgeshire, but if you are not familiar with it, 88 units that were part of a larger, high profile development and that were either complete or close to it are having to be demolished because of defective foundations.
The issue was caught before the units were sold or occupied, but that's not to say it's not a serious problem. As well as being embarrassing, it will cost an estimated £40 million to deal with. Presumably, there are many furious purchasers with time-limited mortgage offers.
It made the news because it's unusual for something so basic to go wrong, but if it can happen here, it (or something equally serious) could happen again elsewhere. What if these were affordable units, and the issue emerged after contracts were exchanged? Or after completion? What recourse might an RP have if this happened to units it was in contract for?
Negotiating development agreements always involves striking a balance. Developers' and RPs' drivers overlap to an extent, but are quite different, and this plays out in the balance of rights and obligations in the contract. A housebuilder's standard form of contract will, unsurprisingly, be friendlier to the developer and lighter on obligations, and there's not necessarily anything wrong with an RP signing up to that. There can be good reasons not to heavily negotiate such an agreement. For example, on a repeat, 10/90 turnkey, section 106 deal, risks may be perceived to be low. RPs build and value good relationships with developers. Competition for sites is fierce. But, there can be an incentive not to be seen to be awkward, and RPs should always be considering the risk profile for each transaction. We must be wary that repeat deals do not lead to a gradual erosion of protections, and that each contract is specific to the risks of each site.
If a defect does arise, the first question is who is responsible. Keeping foundations as our example, it could arise from a negligent survey, inadequate design, or poor workmanship, each of which could be the responsibility of separate people. Are the provisions of the development agreement (DA) wide enough that the developer is liable for the actions of its consultants and sub-contractors? Did the developer accept responsibility for the design as well as the delivery of the works?
If not, it is generally very difficult to claim against anyone that you are not in a contractual relationship with, so we need to consider the web of agreements between the parties. If the defect was caused by someone other than the developer, does the RP have a direct contractual relationship with them, for example through collateral warranties? This is not common on a s106 scheme, but it should certainly be sought on land-led deals. If there's no contractual relationship, then you could be in difficulty.
A second question is when the defect emerged. If before handover, then the RP is in a stronger position. It will be able to refuse to take the affected units, as they will not be practical complete (usually expressed in terms of being completed in accordance with the DA and ready for occupation).
All DAs will set out a date by which the units should be ready, but the consequences of them being late will depend on the specific drafting of each one. Liquidated and ascertained damages (LADs), charged as a fixed sum per week, provide a powerful incentive to the developer to be on time, and are often strongly resisted for the same reasons. If there's no LADs, there is just the blunt instrument of termination for breach of contract to consider. Whether this is available will be highly dependent on the facts, and does it really achieve what the RP wants anyway?
If it emerged after handover, is it within the defects liability period, which is usually only twelve months? If it is then again, the developer will usually be responsible, but if outside it, developer's standard form agreements often exclude all liability. A substantial retention provides protection if the developer fails to sort the problems out; but for something like foundations it will almost certainly be insufficient.
If it is the case that its outside the defects liability period, then the RP will have to rely on the latent defects insurance (NHBC or similar). While this helps, it is an insurance policy, and subject to the exclusions and caps in the same way as any other policy, so is probably not a cure-all.
Aside from the legal aspects, a more fundamental question is whether the developer itself is robust enough that the RP is confident it has the capacity to deal with problems and the longevity to be around if future problems emerge. This is a question of financial strength, and a small developer or an SPV present a different risk profile to a large national housebuilder. If the developer becomes insolvent, is it covered by the latent defects policy at all? Our perception is that policy providers are becoming less willing to offer this.
This is necessarily a brief overview of a complicated subject. If protections are not agreed at heads of terms stage, they can be very difficult to negotiate later. As always, keep risk constantly under review, and take advice early.
