17.07.2023

Contract structures for developers and housing associations contracting on new build dwellings.

If you are housing developer looking to sell new build plots to a registered provider of social housing (“RP”) or indeed an RP looking to purchase there are several contract structures available to you, each with its own advantages and disadvantages.   In this article we will discuss the three most common options and some of the key considerations:

Turnkey (10/90)

This method involves a sale and development agreement which would usually cover all plots to be sold. As well as setting the terms of the sale including the purchase price and deposit payable for each plot (typically 10%), this agreement would also incorporate development obligations to be complied with by the developer. These obligations would refer to a specification and build programme annexed to the agreement. RPs will typically want to see very robust defects provisions, snagging provisions and a clear process for them to certify when practical completion has taken place.  On the other hand, a developer would much prefer a simple “notice” procedure whereby the developer tells the RP when the plot or plots are practically complete and ready for occupation.

Golden brick

This method is typically employed where the land upon which the dwellings are to be constructed is subject to VAT.  By utilising the golden brick method, the land is transferred when the dwellings are partially completed and zero rated for VAT purposes.  Thereafter the RP would either pay fixed stage payments such as first fix, second fix, roof etc or they would pay monthly valuations. Upon the transfer at golden brick the RP would pay the land value plus the cost of the works to achieve golden brick stage.  Golden brick stage is generally accepted as being the first brick laid above the damp proof course.

Monthly valuations / JCT contract

The third option is for the developer to transfer the bare land to the RP and simultaneously complete either a JCT design and build contract or a bespoke development agreement which includes provisions for monthly valuation payments. For this structure a simple sale and purchase agreement could be employed with the form of build contract annexed to it. The build contract would allow for the developer to recoup all the build costs incurred monthly (subject to agreeing this with the RPs employer’s agent). This has advantages to both parties – for the RP from a risk perspective they will only ever be paying for the works that have been completed and for the developer from a cash flow perspective. The main risk with this structure for the RP is insolvency of the developer as it would inevitably prove more costly for them to bring in a third-party contractor to finish the works.

Key considerations for both parties

As with most types of contract, mitigation of risk will be key for both parties.

From the developer’s perspective they will want to ensure that they are promptly reimbursed for any costs incurred (in the case of monthly valuations or stage payments).   Critically in any of the three scenarios, the developer will require that the definition of “practical completion” is not too broad so that the RP can delay completion due to minor snagging which can reasonably be dealt with after completion.  If the contract includes any form of “liquidated ascertainable damages” (“LADs”) – fixed penalty sums payable if the build is delayed, then the developer should insist on “extension of time” provisions to allow for delay events that are outside of the reasonable control of the developer.  A recent example of where such “force majeure” provisions proved valuable for developers was the COVID-19 pandemic.

As for the RP, prompt delivery of the dwellings in a fit and habitable state and to a high quality finish will be key.   The RP may also look for an exit if the build is delayed such as a long stop date in the contract after which they can terminate.

Walker Solicitor’s Residential Development Team are on hand to advice both developers and RPs in respect of all types of development agreements – for further information please contact Matthew Roach.