To ensure the financial success of any development, legal council must maximise contractual flexibility for the Developer, ensuring that settlement takes place, in spite of the numerous challenges and opportunities that may present to the Developer through the process.
In any development the financial success depends upon two critical factors: 1. Time, which converts to holding costs, and 2. Certainty, which means the likelihood of the developer being able to settle.
The issue that the developer has, is that after it secures the site, whether by way of exchanged contracts, options, or development management agreements, it is racing against the clock to assess the site in order to:
- Determine its maximum development potential having regard to market demand
- Engage consultants to assess the viability
- Endure the time consuming process of procuring approvals including appealing against refusals
And when obtained, assessing the prospect’s risks and costs of seeking to improve the ‘quality’ of that approval (which may mean further S96 amendment applications or Land and Environment Court appeals)
- Preparing construction certificate plans
- Producing the building contract and going out to tender;
- Procuring development finance, which may involve the financier vetting the preferred builder.
At some point the Developer will commence its marketing plan and seek to sell lots off the plan, as most lenders will require a number of presales (in an acceptable contract form) before making any advance.
In addition the Developer is seeking to minimise its risk by ensuring that the market has an appetite for the product that it is proposing to offer for sale.
This impacts design, development applications and as such can increase time and associated costs to the bottom line. For example, offering a development with the majority of three bedroom units at $2m plus in a location whose audience is looking for a sub $1.5m product and primarily two bedroom offerings can have a significant negative impact on the viability of the project, and will inevitably add time and therefore cost to the bottom line.
A flexible contract should ensure settlement and maximum return. Critical in managing risk and cost is the flexible contract, which must contemplate sales to buyers with conditions precedent in circumstances where:
- Approvals are not procured
- Approvals are obtained, but not on Volume 1 terms and conditions acceptable to the developer
- Insufficient sales take place by a deadline date, which may be able to be varied,
- Finance is not forthcoming or not on terms and conditions acceptable to the developer.
- Further development opportunities arise within the project that present significant upside to the developer (for example zoning and DA changes).
The flexible contract will make significant disclosures of possibilities (development variables) that may take place in order the give the developer a greater opportunity to modify its plans for the development, whilst minimising the opportunity for purchasers to avoid proceeding to settlement.
“The fine line between flexibility and saleability”
There is a fine line between incorporating terms that would not be acceptable to purchasers and conditions designed so that the developer is protected.
Obviously, in a rising market where demand has been outstripping supply in many areas in Sydney, the developer is able to impose its position of maximising flexibility, however that position may change and the developer will need to consider what other criteria it can impose or how it can convince the purchaser to accept its terms.
Not withstanding the apparent negotiating imbalance between it and the purchaser, the developer will be entertaining a significant development risk if, in order to save time and therefore cost, it takes its product to the market without all plans and approvals having been granted.
The moral of the story — retain a law firm with experience in producing contracts for developers and then independently evaluate and critically consider the contract before its finalised, so as to question the flexibility that you as the developer may require if your proposed development needs to be altered or replaced.
Gil Baron is the founder and principal of Baron + Associates, with 34 years practicing experience across commercial and residential developments. Baron + Associates acts for numerous leading developers and high net worth individuals, most notably Bondi’s Pacific development, Sydney’s most successful launch of a residential offering in a mixed-use development.
Baron + Associates
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