|The article below follows on from our series of seminars for Junior Land Buyers. Click here to read the previous article.|
COVID-19 has dominated all aspects of our lives for the past year, with the drafting and interpretation of legal contracts being no exception. In this article, we explore key points to consider when negotiating development agreements in a post-pandemic landscape.
‘After the event’
Perhaps the most crucial consideration from either party’s perspective is the fact that the development agreement in question will be entered into after the effects of COVID-19 have manifested themselves. The operation of many precedent clauses (which will have been irrefutably triggered under countless agreements at the outset of the pandemic) could well be limited or even extinguished under new contracts moving forward.
‘Force majeure’ clauses are a prime example. It is generally accepted at law that force majeure events can be broadly characterised as unexpected and exceptional circumstances that arise outside of a contracting party’s reasonable control and which prevent that party from performing its contractual obligations.
It seems fair to say that COVID-19 could fit squarely within that description in terms of contracts entered into prior to the effects of the outbreak taking hold in the UK. In terms of new contracts under negotiation, however, it is unlikely that COVID-19 will be treated as a force majeure event. Everyone is now aware of the pandemic and so, broadly speaking, its effects can no longer be said to be ‘unexpected’. Parties will be expected to price and programme accordingly or draft for it in the contract.
When accounting for COVID-19, parties should therefore be very wary of relying on existing provisions in their standard documentation dealing with ‘force majeure’, ‘exceptional events’ and the like. Instead, buyers and developers should carry out full risk assessments and negotiate specific points into the contract, to guard against the likely impacts of the virus.
From the buyer’s point of view, the following in particular should be borne in mind when negotiating bespoke COVID-19 drafting:
In a residential development context, the buyer will usually be purchasing the relevant units for an agreed price, which will only be adjusted if the specification is varied. As such, any clauses granting the developer a right to post-contract price uplifts for COVID-19 related costs should typically be resisted.
The buyer will invariably need to accept some form of extension of time clause, allowing the developer to apply for programme extensions if it is delayed due to pandemic-related matters. Care will be needed to avoid open-ended drafting that risks giving the developer effective ‘carte blanche’ to submit any number of (possibly tenuous and/or unquantifiable) claims arising from generic matters like global economic downturn, supplier insolvencies, national labour shortages and so on. In the right circumstances, this kind of wording could remove much of the buyer’s ability to hold the developer to any kind of meaningful programme.
As a buyer, it is important to consider how long you are prepared to allow a COVID-19 delay (or indeed any form of delay) to continue. Development agreements very often include the concept of a ‘longstop date’; an absolute, worst-case target date for build completion which, if missed, will allow the buyer (or sometimes either party) to terminate the agreement. It is worth checking whether any such ‘longstop date’ termination right extends to COVID-19 delays.
The buyer should also consider whether any contractual flexibility is needed in its own favour. Build programme extensions for the developer are one thing, but what about flexibility on inspection timescales? What if the buyer’s agent is self-isolating and cannot inspect the units within the required contractual timeframe before build completion is deemed to be achieved? All of these factors must be covered as well.
From the developer’s perspective, equal care will be needed to avoid getting hamstrung by narrow drafting and contractual technicalities. For instance:
- As well as analysing the operative clauses which actually set out how the developer will obtain COVID-19 relief, it is also important to check the detail of the contractual definitions. A definition of ‘Delaying Event’, for example, might refer to site closures necessitated by the pandemic. This is all well and good in itself, but the definition will be of little use to a developer if it does not cover less extreme measure as well, such as partial shutdown or the imposition of new social distancing requirements on site.
- It is fairly common in development agreements and other forms of construction contract to see a requirement for the developer to exercise ‘best endeavours’ to mitigate the delay or the additional cost in question, with the buyer only required to grant relief to the extent that the best endeavours obligation is adhered to.
A best endeavours requirement is a fairly onerous obligation under English law. It does not mean ‘second best’ endeavours; rather, the promisor must do all in its power to bring about the result, even if that means subordinating its own interests. In the context of COVID-19, it could mean a developer having to pay acceleration costs to its supply chain after a period of site shutdown, or paying an over-priced retailer for materials that are not readily available from its usual wholesaler. Such clauses should therefore be treated with caution and, if possible, diluted to a ‘reasonable endeavours’ obligation instead.
- Developers must also be alive to any strict pre-conditions (or ‘conditions precedent’) to obtaining contractual relief. If, for example, the contract bars the developer from obtaining relief where it fails to formally notify the delay within a set timeframe, is compliance with that timeframe realistic and achievable?
Parties who continue to rely on pre-pandemic force majeure drafting, to deal with the ongoing ramifications of the virus, do so at their peril. COVID-19 continues to present extensive and evolving challenges for the residential development sector. It is crucial that those challenges are addressed head-on in development agreements, by clearly and comprehensively setting out the commercial agreement on risk allocation.
For more information on this article, please contact Laura Reeve.
|Ashfords run a series of seminars for anyone involved in the world of real estate development who would like to learn more about the legal process behind the deals. The seminars are led and organised by our team of residential development solicitors, providing an opportunity to share knowledge and build lasting connections in an informal and friendly environment. Here are a list of future seminars for Junior Land Buyers, please let us know if you would like to receive notification of these events.|