“It has become imperative for developers to be astute in their selection of builders and negotiation of associated legal documents ”
– Ashley Hartman
Article by Monark Head of Legal, Ashley Hartman (pictured above)
The property industry has witnessed an unfortunate wave of builder collapses, causing ripples of concern among developers, financiers and other stakeholders. The fallout for developments often includes delays, financial losses, and compromised project integrity.
Against this backdrop, it has become imperative for developers to be astute in their selection of builders and negotiation of associated legal documents.
Though the upfront costs of legal consultations may seem daunting and the legal process arduous, the consequences of inadequate legal safeguards, including flawed Building Contracts and associated documents such as Builder Tripartite Deeds, can lead to far more dire outcomes.
Monark, drawing from our experience partnering with numerous builders alongside developers, has garnered invaluable insights into how to navigate complexities and challenges across various projects.
The importance of a Building Contract
A robust legal construction agreement is paramount for mitigating risks and ensuring a smooth project execution. The Construction Contract establishes clear expectations, roles, risk matrix, and responsibilities; reducing the likelihood of disputes. Pitfalls in Construction Contracts, such as vague terms or inadequate risk allocation, can lead to costly litigation.
Astute legal advice and drafting is crucial to identifying and addressing potential issues before they escalate. Examining clauses related to scope, payment, delays, and dispute resolution is vital, as these can significantly impact project outcomes. Mediation provisions offer an alternative to protracted legal battles, promoting timely and cost-effective conflict resolution.
Overall, a carefully crafted construction agreement, backed by thorough due diligence and attention to critical clauses, provides a solid legal foundation, safeguarding all parties involved and fostering successful project outcomes.
In instances where Monark is engaged prior to execution of a Construction Contract, we employ close collaboration with the developer to ensure the Building Contract is structured to achieve equitable and balanced risk allocation. Moreover, we conduct thorough due diligence on each builder with whom we work, which includes:
1. Assessment of the corporate profile of the builder, encompassing a comprehensive capability statement.
2. Examination of the builder’s financial statements to ascertain financial stability and viability.
3. Review of details pertaining to projects completed within the preceding two years.
4. Compilation of a summary of active projects (Work in Progress) and forthcoming projects.
5. Verification of pre-engaged subcontractors and evaluation of the builder’s previous engagements with them.
6. Review of standard/template subcontract and executed subcontracts involving major subcontractors.
7. Evaluation of key personnel, including Project Managers and Construction Directors, often involving the solicitation of curriculum vitae (CVs).
8. Analysis of trade coverage and breakdown, including procurement strategies (local vs. overseas) and review of key suppliers essential to project operations.
Through meticulous examination of these factors, we strive to ensure that all parties involved in the construction process are well-equipped to navigate potential challenges and achieve optimal project outcomes.
How Builder Tripartite Deeds can be your friend rather than your enemy
When it comes to documenting project finance documents, no one likes incurring what sometimes feels like unnecessary legal costs and undergoing a painful process of negotiating documentation. Consequently, Builder Tripartite Deeds can feel like an unnecessary evil. However, these deeds serve as essential protection for all parties involved: the developer, the builder, and the lender.
In a dooms day scenario, which is not uncommon during these uncertain times, a builder may fall into trouble resulting in project halts and ultimately the project being unviable. If the result is selling a site mid-way through a project no one wins. However, this can be prevented by taking swift action before matters escalate assisted by having watertight legal documentation between all parties already in place.
Builder Tripartite Deeds are an instrumental tool in pre-empting potential delays and complications that may arise in the event of builder solvency issues. These deeds play a pivotal role in clarifying the status of all parties involved and delineate the respective rights and obligations pertaining to both the construction project and the associated loan.
The deed is designed to provide lenders with the ability to “step-in” strategically, thereby mitigating the risk of project disruptions when a builder faces insolvency or ceases work on a project. By clearly defining the roles and responsibilities of each party, these deeds serve as a proactive measure, offering a structured framework that not only facilitates a smoother resolution of issues but also bolsters the overall risk management strategy for all stakeholders involved.
Builder Tripartite Deeds also serve as an alternative means to incorporate essential provisions or modifications to a Construction Contract that may have been overlooked during the initial drafting phase. The lender’s legal representative will conduct a comprehensive review and due diligence, often referred to as a bankability report, of the Building Contract. This review aims to identify associated risks and propose necessary changes to ensure a more favourable and market-aligned risk allocation. These modifications to the Building Contract are typically executed through a variation to the contract, which is annexed to the Builder Tripartite Deed.
Things to look out for with pre-builder insolvency
There are a number of indicators that a builder is under financial stress or heading towards insolvency. Accordingly, despite the builder having full access and control of the site once the Building Contract commences, it is important to keep a close eye on day-to-day works and any changes in momentum on site. Developers should pay close attention to all construction works underway. The best course of action is to act when works slow and there is suspicion that the builder may be in trouble (not after the builder is trading insolvent or goes into Voluntary Administration).
Things to keep an eye out for include:
a. Subcontractors not showing up on site
b. Project manager leaving
c. Slippage on project timelines
d. Slowing in work and small drawdown claims
If you wait too long to raise issues and act, you could be caught by the Safe Harbour and Ipso Facto Stay laws.
The Safe Harbour exception to insolvent trading laws allows directors to continue operations under certain conditions whilst technically trading insolvent, providing protection from personal liability. Developers must remain vigilant, as the Safe Harbour regime can potentially delay the revelation of a builder’s insolvency.
The Ipso Facto Stay laws further complicate matters, imposing a moratorium on enforcing rights under Building Contracts during specific periods of insolvency. While the laws aim to promote entrepreneurship and innovation, developers need to be cautious, as key enforcement rights are restricted during these moratorium periods.
Monark’s Conclusion
In conclusion, the importance of meticulous legal documentation in construction projects cannot be overstated. It serves as a safeguard against unforeseen challenges, ensuring project viability and stakeholder protection. With proactive measures such as robust Building Contracts and Builder Tripartite Deeds, developers can navigate complexities alongside the financier with confidence, mitigating risks and fostering successful project outcomes in an increasingly uncertain landscape.
Article featured in The Monark Minute and written by Ashley Hartman, Head of Legal, Monark Property Partners.