Construction Risk in Property Development
A large part of the VWV Construction team's work is assisting property lawyers (both internally and externally for VWV Approach members) advising their clients upon the construction risks that are inherent in the development of commercial property.
Construction risk cannot be completely avoided but it can be managed. Any developer will tell you they have the best site in town but to turn their architects' dreams into a sellable product they need to put a spade in the ground. He has to break some eggs. Once a developer has found a prospective tenant, both parties will be keen to enter into an Agreement for Lease to agree how the building they are expecting will be delivered. While the property lawyers consider the title and terms of the lease, construction lawyers are able to advise upon the collateral warranties or third party rights package that the tenant will receive to reassure him that he can have some recourse if the building suffers from an inherent defect and the tenant is required to make good upon his repairing obligation.
Collateral Warranties are still the most popular form of security for an incoming tenant upon an FRI lease. The Contract (Rights of Third Parties) Act 1999 has been with us for over 20 years, but only in the last five years has its operation become popular. Initially funders, tenants and insurers were nervous as the rights were not proven to work in practice. There has still been no significant case law but developers and funders are seeing the benefits of operating the Act as it allows rights to be stepped down without the volume of paperwork that collateral warranties generate. The transition is still work in progress. In either case the intention is to provide a tenant - or indeed a funder - with the right to sue the design consultants (architects and engineers), the contractor, subcontractors or an employer's agent if there is a defect in the development for which they are responsible
VWV's Construction team advise upon how to create third party rights and collateral warranties safely and economically and how to avoid some of the common pitfalls.
Developers have to negotiate and engage with contractors and consultants whilst being closely monitored by tenants and funders. The terms upon which they contract can directly affect the protection that the collateral warranties or third party rights offer to the tenant and funder. VWV's Construction team understand the balance that needs to be struck between the contractor, developer, funder and tenant. If either party is allowed to have too much of their own way, either the tenant and funder are aggrieved as they do not have sufficient protection or the contractor and consultants threaten to increase the price.
The Agreement for Lease itself also is a balancing act. Whilst the tenant wants certainty upon the specification of the building s/he is receiving and dates upon which s/he will be able to move in, the developer needs leeway in the construction programme to allow for unforeseen circumstances with Covid being a prime example. VWV's Construction team have considerable experience in this area, acting for developers delivering out of town retail offerings, leisure, amenities, office buildings and student accommodation. We can supplement your property advice and guide your developer into a safe and robust contractual framework.