Restarting joint venture development sites
Over the past weeks, we have been advising a number of housing providers and developers as regards the impact of the Covid lockdown on the sites they are developing under joint venture arrangements.
Joint ventures take many forms, and the relationship between the joint venture parties may be governed by members' agreements, by joint venture agreements and/or by service level agreements.
But what they all have in common is the need for joint venture parties to agree commercial and practical matters as they arise; and to reconcile their perspectives on such issues, where they differ.
So, as works re-commence on development sites, we have identified a number of issues for particular consideration by joint venture partners engaged in joint venture residential development:
Timing and extent of the re-start
Where two or three parties are engaged in development, joint venture partners may have some differing views as regards the timing and the extent of the re-start of works on site. In order to avoid potential dispute, it is important for each party to identify and express what its drivers in determining such matters are.
These drivers may include: protecting the current year turnover; protecting the profitability of the development in question, reputational and regulatory issues, the availability of internal resources, and the parties' different furlough arrangements.
By their nature, joint venture developments can be of significant size, and require significant upfront infrastructure work to be undertaken (and paid for), in order to allow phases of a scheme for residential development to proceed.
Uncertainty in the residential sales market can impact on the willingness and ability of joint venture partners to commit to such infrastructure spending, until some degree of certainty returns to the market.
Alterations to the programme
Most joint venture agreements will include an agreed development programme, which the parties are working to. How has that development programme been affected by lockdown, and how will it be affected after re-start? Factors such as revised working practices and restrictions on supply of materials will have a direct impact.
We have seen a broad range of estimates of the impact of social distancing on the productivity and efficiency of construction work on development sites - ranging from 25% to 90% of 'normal' progress.
Do the joint venture partners now wish to propose any amendments to the development programme; and what does the joint venture agreement provide for in terms of agreeing and recording such amendments?
Do the joint venture parties want to re-consider the delivery timescales for both the completed 'open market' units, and for the affordable units (for the RP)? Which 'hat' are joint venture partners wearing as regards affordable housing, in considering that matter?
If the joint venture has put in place a building contract or development agreement with an RP for affordable units, for example, what does that contract or agreement provide for, in relation to delay to the works, force majeure and the associated costs of delay?
Have the joint venture partners agreed how to operate the supply chain documents so as to mitigate the risk of a loss and expense claim being brought?
It will also be important to identify any external constraints on changes to the development programme (e.g. timescales in help to buy funding agreements, or in grant funding agreements, or any planning or s106 requirements for delivery and sequencing of works).
There is, without doubt, uncertainty as to the future of the residential sales market - what will happen to sales prices; how long will any dip endure; how steep will the recovery be? So, it will be important to review any 'market collapse' provisions included in joint venture agreements.
Has the definition of 'market collapse' been triggered? And, if so, what rights and obligations do the joint venture parties have? Does any joint venture party have the ability to require a longer suspension of works, pending market recovery?
Revisions and disputes
A significant feature of joint venture deals is the ability to include flexibility to address unforeseen circumstances. So, it may be that the joint venture parties can look at revisions to the tenure mix of the units they are providing; and may consider further negotiation with housing association and local authority partners, as regards affordable housing.
If there are differing views on any such matters between joint venture partners, how is that difference to be best resolved under the joint venture agreement? Where there is a 'reasonableness' criterion, the parties should consider what are reasonable grounds for withholding agreement to such a proposal? And the parties should be aware of what is the dispute resolution procedure under the joint venture agreement, where joint venture partners cannot agree a proposal?
As always, it will be necessary to consider public procurement rules, where revised terms are proposed on joint venture schemes involving any public sector or RP partners. A risk analysis as to such issues should identify options for the joint venture partners to pursue.
It will be important to identify any impact of delay and re-start on the joint ventures funding requirements; and it may be possible to explore any further grant funding opportunities, particularly where this can be done through joint venture partners themselves.
Most joint venture arrangements will include the required degree of flexibility for joint venture parties to explore and propose solutions to such issues, and a process for agreeing terms that the parties will find mutually acceptable. To avoid any possible future disputes or misunderstandings, it is preferable this be done by reference to the processes and obligations set out in the relevant joint venture documents, and that outcomes be clearly recorded.