The last 12 months within the Qld development market have seen the rising cost of materials, availability of skilled labour and access to certain trades severely impact on the viability of starting or completing developments. What has been described by some builders and developers as a ‘perfect storm’ of events.
Being a developer is a hard business, and many do not understand the stresses and uncertainty that developers face in starting and completing projects. Developers often need pre-sale contracts (off the plan sales) to obtain funding to complete their development, or for certainty of return on completion. No developer wants to revisit a sale price once a contract is signed, however recent events have forced developers into the unenviable position of needing to do so to allow the project to commence, or being completed, and not failing part way through.
When faced with viability issues in their developments, there are a number of factors which come into play.
Pre-sale legals
The basis for a successful purchase price re-negotiation occurs at the very beginning of the project even before the first sale contract is signed.
Simple viability clauses in your standard off the plan contract (OTP), which merely allow for a developer to terminate all contracts on the basis that the development is no longer viable, can severely limit a developer’s options during the Contract re-negotiation process. These clauses are often not flexible enough to deal with all situations which may arise, for example allowing for the development to proceed with some contracts as opposed to the entirety of the contracts.
Project viability clauses require explicit and precise wording, as opposed to a general termination clause. In the current times, the risk of a developer initiated termination being challenged by a buyer has increased proportionately in line with the QLD property prices. We have recently successfully re-negotiated for developers under viability clauses, with confidence given to the developers to act due to the precise early drafting.
Communications with Buyers
Buyers who have been closely involved with a development, by way of input into design items, or even regular developer updates are often more invested in the successful outcome of the development, as they feel part of the process. In our experience, this can lead to them being more understanding of unforeseen circumstances and cost over runs. Accordingly, keeping buyers involved (or at the least updated) may assist in any necessary negotiations.
Future Proofing your Development
Many developers may baulk at the prospect of continuing with a development in the face of cost over-runs and supply issues which are now regrettably becoming part a regular occurrence. We have found that many hurdles can be overcome if the parties communicate regularly and clearly and value can be demonstrated. In circumstances where a satisfactory resolution cannot be reached then a developer needs to be able to rely on a clearly drafted viability clause to proceed and to grant them the necessary flexibility to terminate contracts as required without the threat or concern of court challenges.
For more information on the above or to have a chat about drafting your bespoke off the plan contracts, please do not hesitate to reach out to our Property Law professionals
