When an owner seeks to develop its land or property and wishes to appoint a developer to do so on its behalf, parties will usually enter into a development management agreement (DMA).
An owner may wish to engage a developer under a DMA for a number of reasons, including the owner lacking the expertise, experience or capacity to carry out the proposed development itself, or because the owner wishes to pass on the management, administration and performance responsibilities in relation to the development to a third party.
This article examines some of the key legal and commercial issues to be considered when entering a DMA. The options considered are non-exhaustive and, as a DMA is generally a bespoke document reflecting negotiated commercial terms, some issues may not be relevant in all circumstances. Professional advice should always be obtained.
Key issues to consider
A DMA may be subject to the satisfaction of certain conditions precedent. For example, a DMA may be conditional upon the owner acquiring the land/property to be developed. Alternatively, the development may be conditional upon obtaining satisfactory approvals, such as planning approval.
A DMA must contain specific wording to deal with conditions precedent. This should include who is responsible for satisfying conditions precedent and in what time period, and the consequences of failure to do so.
In addition, a developer may require adequate provision for the recovery of costs in relation to any services performed or expenses incurred in the event of DMA termination for non-satisfaction of any condition precedent.
Development Management Fee
The assessment and calculation of the development management fee is one of the most important DMA provisions.
A development management fee can be calculated in a number of different ways:
- A fixed fee: - A lump sum fee payable on key dates or upon completion of construction milestones;
- A percentage of development costs:- A percentage of costs borne by the owner in relation to the development;
- A percentage of development income: - A percentage of the proceeds of sale and/or other sums of a capital or income nature received by the owner in relation to the development;
- A success fee: - An amount based on the profitability of the development which usually only applies where a certain threshold or hurdle rate has been achieved; or
- A combination of the above.
A detailed understanding of the above options is critical. For example, perhaps the most common form of calculation is for the development management fee to be based on a percentage of development costs: what constitutes the development costs is crucial for properly linking the development management fee to the cost of the development, whilst ensuring an inefficient developer is not rewarded.
Budget & Costs
A DMA should contain provisions providing for the preparation of a development costs budget in relation to the development. This is usually prepared by the developer and is subject to owner approval. The budget will usually focus on the anticipated development costs for the next 12 month period. Two of the most important developer obligations are ensuring the development is completed within the agreed budget whilst following an agreed development programme.
A further important provision within a DMA is the clarification of responsibility for incurring development costs. Whilst such costs should ultimately be borne by the owner, there are essentially two options: the owner can incur such costs directly at the request and direction of the developer; secondly, the developer can incur these costs, seeking reimbursement from the owner at a later stage.
The developer may agree to incur costs below a certain threshold and seek reimbursement from the owner. However, there is general reluctance to do this in relation to all development costs.
The developer may still encounter issues as a result of the owner bearing direct responsibility for the development costs. For example, the owner may be slow in making payments, impacting the development programme and the obligations imposed on the developer.
Consequently, a possible solution may be for the owner to deposit monies into an account which can be accessed by the developer subject to either the ownerâ€"s approval or other agreed parameters. The monies deposited will take into account the anticipated expenditure set out in the development costs budget.
Services & Authority
Parties must carefully consider the scope of services required by an owner and those provided by the developer. A detailed scope of services is usually included as a schedule or an appendix to a DMA and can be as limited or wide ranging as parties require. Some examples of services provided by a developer under a DMA include general business development activities, legal and investment related services, project financing, design document co-ordination and development, permit processing, procurement services, construction and project management, development marketing, leasing and sales and facilities and asset management.
The level of authority granted by the owner to the developer must also be considered. It is usual for the owner to retain an element of control in relation to the management of a development by requiring the developer to obtain his consent or approval in relation to important decisions, processes, procurement options, or where services undertaken will result in a financial threshold being exceeded. An owner may also require representation on a project committee established in relation to the development as well as detailed and regular reporting obligations the developer must satisfy.
In addition, a DMA will usually provide for contracts to be entered into by the owner, allowing the developer to negotiate the same on its behalf. Alternatively, the owner may permit contracts below a certain value to be entered into directly by the developer on behalf of the owner through delegated authority.
Suspension & Termination
In addition to standard suspension and termination provisions, a DMA may need to incorporate more unusual provisions. For example, the scope of services may include the sale and leasing of the development. Depending on the precise event of termination, the developer may seek compensation for a sum equal to the unsold value of the development. How to calculate the unsold value and from what date will be key issues. A DMA may be subject to key performance indicators (KPI). A failure by the developer to meet the KPIs imposed under the DMA may be of such significance as to become an event of termination.
This article has identified some of the key issues to consider when entering into a DMA. The precise terms will depend on a number of factors, including the nature, size, location and complexity of the development.
A DMA is generally a bespoke contract, therefore professional guidance and expertise should be sought at the outset, ensuring the DMA will effectively govern the relationship between the parties, minimise the risk and increase the efficiency and quality of the resulting development.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.