In the current economic climate where private developers and their banks struggle to complete projects, a developer may take the decision to sell a development which is partially completed. Acquiring sites from distressed developers can present a good opportunity, but only if significant problems can first be resolved.
The insolvent seller
Lack of information can be an issue. Even if an insolvency practitioner (IP) has been employed for some time, he will usually have little knowledge of the site. His replies to the buyer’s preliminary enquiries will not carry much value because he will specifically exclude any personal liability in respect of the replies given.
In the absence of any warranty or indemnity protection, the buyer will be solely responsible for any continuing liabilities attached to the property. Without any means of imposing this liability on the seller, any ongoing liability will need to be taken into account when agreeing the price.
Many decisions will be driven by when, in terms of the construction time line, the development is to be sold. If practical completion has been certified most of the defects remedied and a latent defects insurance policy is in place, the new developer is likely to have few major concerns. However, significant issues will arise if the project is partially completed and practical completion has not been certified, the project is running late or numerous changes have been instructed.
These issues are likely to include:
The extent of outstanding works and the progress on site, the costs required to complete (including liquidated damages) the value of the retention; liability for defective work; and insurance.
In today’s economy, particular due diligence will be required to assess the financial standing of the contractor and any key subcontractors. The security package that included parent company guarantees and bonds will also need to be scrutinised, as will warranties and third-party rights. The insurance of the works and the security of material to be included in then will be of continuing concern. Insurers will need to know that the insured party has taken all appropriate steps to protect its position.
The new developer will have to decide how to proceed to completion. Will they use the existing contractor and professional team or appoint their own? What happens if the construction contract has been suspended under a provision entitling the existing developer to do so? What are relations like on the site?
Developers have several options: novate the construction contracts; complete the works using their own professional team; or enter into direct arrangements with subcontractors via step-in rights.
A buyer should review the terms of any development agreement, to check whether any step-in provisions have been exercised, and any overage agreement. If provisions will or could bind successors in title to the owner, the buyer should ensure that they are released, or factor into the price the possibility of future overage payments.
If the stalled development has planning permission, the buyer should determine whether this has been validly implemented. Most planning permissions carry a condition requiring that the development is started within three years of the date of the permission. If the buyer intends to build the consented scheme, the permission will lapse if it has not been implemented within the specified time-frame. To implement a permission, the developer must undertake a “material operation” which is defined by statute and can involve as little as demolishing an existing building or digging a trench for part of the foundations. The buyer should check that the seller complied with any conditions that needed to be fulfilled prior to starting the development. Case law has held that undertaking work in breach of a condition in a planning permission will not keep the permission alive.
The buyer should also consider the terms of any Section 106 Agreement, since starting the development could trigger payments due under that agreement.
A buyer that intends to acquire the site and do nothing with it until economic conditions improve may receive a maintenance notice from the local planning authority. The local authority can require positive action on the part of the owner or occupier to demolish, rebuild or clean up the site.
Numerous legal issues will also have to be investigated when a stalled development is being acquired. In addition to the usual title and investigation, the buyer will need to consider health and safety risks, contaminated land issues, breach of planning notice and occupier’s liability.