Date: 08/05/2020 | COVID-19, Residential Development
The effect of all of this has been to bring aspects of our lives to a shuddering halt and we hear all about the expected impact on the economy. Inevitably, this causes people and businesses to reflect on their own personal positions and to try to understand what the impact will be on them. In times like this the trite adage, cash is king, comes into its own. It feels as though we are back to the days of the 2008 Crash; and some.
What this means is that in some sectors businesses are looking at their contractual commitments and asking themselves various questions. Questions such as: “do I still want to do that deal?”; “do I still want to do that deal at that price?”; “do I still want to do that deal in that timescale?”. Where the answer to any of these questions is “no” that in turns leads to either looking at how to get out of the deal, or to amend it. Where there is no contract in place then getting out of it is easy, at least as a matter of law. Once there is a contract in place things become rather more complicated.
Experience tells us that sectors such as housebuilding will be particularly drawn to such considerations. This can be for various reasons but key is the uncertainty around cash flow, future sales, valuations, prices and timings. The wider economy impacts house sales very directly because people will not or cannot buy a new house if their own financial circumstances have been impacted by the economic consequences of the events that surround us. The nature of the current crisis exacerbates this because we are all being told to accept the “new normal” which will involve increased working from home. What will that mean for the people who provide new homes, the housebuilders? Will they need to redesign their product – for instance to include multiple dedicated home-working areas – and what impact does this have on their financial models?
If you are a landowner who has contracted with a housebuilder for the sale of housing land what should you do?
1. Firstly, don’t assume that every housebuilder will look to bring their deal to an end or to amend its terms. Many builders have a clear vision of the future which goes far beyond the next three to six months. One outcome of the 2008 Crash is that many businesses in this sector are far better capitalised than they were in the past and have the heft to be able to ride out dips such as the present.
2. Contracts typically contain rights and obligations. In the 2008 Crash some builders took a broad brush approach and terminated every contract where they were able to do so. Landowners should make sure that if the contract includes any obligations on them, they have done everything that they should have done. Do not give someone an easy way to bring the contract to an end by failing to meet your own contractual obligations.
3. Make sure that any financial protections you have agreed as part of the contract are in fact in place. If the developer has purchased some or all of the site and you are anticipating future overage payments, has the overage agreement been signed by all parties and is the standard security backing it up in place? If a parent company guarantee is provided for, is it in fact in place?
4. Understand what it is the housebuilder is obliged to do in terms of the contract and encourage them to stick to any agreed timetable. Engagement with the housebuilder now, either directly or through your agent, may mean that your site is seen as being more important than a site where there is no engagement.
5. In appropriate cases be flexible. Whilst the current circumstances are not of your making, equally they are not of the housebuilder’s making. It may be better to agree to amend timescales than to hold out for the current deal if that means that the current deal may not happen at all.
6. Lastly, if you are approached by the housebuilder looking to amend the contract, or if you receive a notice attempting to terminate the contract, take advice from qualified and experienced advisers who can help you to negotiate the best position possible for you.
At Davidson Chalmers Stewart our Residential Development Team is highly experienced in advising both landowners and developers on the intricacies of housing development. If you are concerned about your position and would benefit from independent advice as to how to protect your position, please contact Stephanie Mackenzie at email@example.com
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