In uncertain economic times, developing housing associations should be clear when delays allow them to terminate a contract. Tom Wrzesien and Alex Murdie, from law firm TLT, outline the potential pitfalls
When development agreements are signed everyone has good intentions. Target dates are set and everyone expects, or at least hopes, that they will be met. However registered providers will be aware that all too often projects experience funding issues, such as escalating costs, resulting in deadlines not being met and projects being halted.
This is what happened in the recent case of Ampurius NU Homes Holdins Ltd v Telford Homes (Creekside) Ltd, concerning a four block development in Deptford, London. The court considered the application of obligations to carry out the work with ‘due diligence’ and to use ‘reasonable endeavours’ to meet the target completion date.
Telford, a property development and construction company agreed to build and grant long leases for commercial units to Ampurius. The project ran into funding difficulties resulting in two of the four blocks being put on hold. A year or so later Ampurius brought the contract to an end claiming that Telford had failed to carry out the work with due diligence and had not used reasonable endeavours to complete by the target completion dates. Telford’s position was that it had done all it could to procure finance and had therefore complied with its obligations.
RPs will be encouraged to hear the court upheld Ampurius right to the end of the contract, making clear that the reasonable endeavours obligation did not provide Telford an excuse when it did not have the money to perform the contract.
If a developer stops work because of a lack of funding, they will be in breach of obligations like those outlined above. This gives RPs the right to compensation but does not automatically give the right to end the contract. To do that, the delay must frustrate the commercial purpose of the agreement. What is important is not so much the length of the delay but how that delay affects the viability of the whole project. A few weeks delay is not usually enough to end a contract, it is more likely to be several months.
The Ampurius case highlights the need for certainty when it comes to termination rights. People are often reluctant, at the outset of a project to discuss what should happen if things go wrong. However, this can be invaluable and RPs should consider the following key points when entering into a development agreement:
- Clear termination rights: Consider the circumstances in which the right to terminate should arise and include them in the development agreement.
- Longstop dates: Including a longstop date gives the building user a right to terminate the development agreement if the development is not completed by the date in question.
- Sections and phases: If different sections or phases of the project are scheduled to complete at different times, RPs should consider how this could affect the use of the development.
- Effect of termination: Consider carefully what payments become due on termination. This is particularly important in phased developments where leases may have been granted on the early phases before the later phases are completed.
In an unsettled market, RPs need certainty. Dealing with termination rights in the early stages of a development agreement saves time and costs in the long run.