COVID-19 and property development agreements

A matter of timing

Property development agreements comprise a series of events and as each is reached and satisfied, the project moves on:

1. Obtaining planning permission
2. Starting on site
3. Completing works

The coronavirus pandemic has the potential to affect the timetable at any of these stages.

Obtaining planning permission

People working from home and/or being required to self-isolate is likely to slow response times from local planning authorities, something which would not have been anticipated when the agreement was entered. A typical development agreement will require the developer to seek planning permission within a few weeks of entering into the agreement and to progress that application. If, however, permission is not obtained by a long stop date, then either party may terminate the agreement. Obtaining permission will often include the conclusion of a section 106 agreement requiring meetings with the planning authority. Requirements to have meetings other than face to face are likely to slow down the process. Any time lost in obtaining the permission and related agreements will add pressure to the process and the need to obtain permission by the long stop date. A typical development agreement will allow for extensions of time to the long stop date if the planning permission is the subject of judicial review or is not a satisfactory permission requiring an appeal. It will not allow for delays in the actual obtaining of planning permission as a result of coronavirus.

Reasonable endeavours

If a contract requires a party to do something within a required time, then it must do it. Such an absolute commitment is not appropriate when a third party, such as a planning authority, is involved. A developer’s obligation is often framed as an obligation to use ‘reasonable endeavours’ to obtain planning permission for this reason. There is case law which establishes what using reasonable endeavours means. The requirement to use reasonable endeavours does not require the developer to sacrifice its own commercial interests, nor to go on using endeavours until the point is reached when all reasonable endeavours have been exhausted. A party using reasonable endeavours need only take one reasonable course, not all of them.

If the developer fails to perform as required, the landowner may have grounds to bring the contract to an end or to argue that the developer is in breach of its obligations. Taking action for breach of the contract is not without its risks, however. If the landowner seeks to enforce the developer’s obligations under the contract and it is found that the developer is not, in fact, in breach then the landowner may be found to be in breach itself giving the developer grounds to end the contract. Everyone hopes that the effects of the pandemic will last a few months and during this time of more extreme measures, a landowner would not want to give reason for a developer to terminate an agreement.

Starting on site and completing the works

As it is impossible to fix the timetable to secure planning permission, the developer will continue to be under an obligation to use reasonable endeavours to start works on site within a set number of weeks from the grant and to secure practical completion accordingly. If personnel and/or materials prove difficult to secure, a developer might still be using its reasonable endeavours and the landowner will have to accept that the timetable will extend accordingly.

The agreement is likely to contain a a ‘force majeure clause’ providing for the developer to be excused from performance on the happening of specified event(s) outside its control. Typically, this clause will excuse the developer from performance of the contract in the event of:

• acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster);
• war, invasion, act of foreign enemies, hostilities, or terrorist activities;
• government action;
• the necessary labour and materials are not, or do not remain, available; or
• the occurrence of any other circumstances beyond the landlord’s control.

Whilst there will be no express reference to coronavirus, it is possible to see that its effects fall with in the provisions of such a clause. Initially it may be that the necessary labour and materials are not, or do not, remain available. Depending on the effectiveness of the measures so far proposed by the government, it may be that direct government action will prevent development proceeding. The developer will have secured similar provisions in its building contract.

Frustration

Frustration occurs when a contract is brought to an end as a result of an unforeseen event occurring after the formation of the contract, which is not the fault of either party, and which has the effect of:

• making it commercially or physically impossible to fulfil the contract; or
• changing the obligations under the contract into very different obligations to those agreed to be undertaken when the contract was entered.

It is rare that a contract is held by the courts to be frustrated. This is because it requires circumstances where performance of the contractual obligations can only be undertaken in a manner significantly different from that which the parties reasonably contemplated. A development contract anticipates delay to some extent and makes allowance for it. Provided planning permission is obtained before the long stop date, or any permissible extension to that date, any further delay is unlikely to be sufficient.

Conclusion

On the basis that neither party is actively seeking a way of avoiding its responsibilities, many development contracts will contain enough latitude to allow a development to complete, although this may be later than envisaged. In view of the limitations on social interaction currently being imposed, this might not be an undesirable result.