The past 18 months have been tough for the construction industry, with many existing development projects put on hold. You only have to look around any major city to see sites locked up, cranes standing still and part-built properties.
The good news is that things are slowly beginning to move again, with major developers (such as Land Securities) recently announcing that they are to press ahead with construction on several London projects that were put on hold as we went into recession.
Depending on what stage the development was at when it was mothballed, there are various issues to consider, which may make restarting construction much easier.
Check the suspension rights under the contract
Aside from the statutory suspension rights for non-payment, many building contracts will include a period during which the employer can suspend the carrying out of the works without the contract coming to an end. Depending on how long the works have been suspended for, you may be able to restart construction with the same contractor (provided it too has managed to survive!).
If this is the case, it is likely that demobilisation costs will already have been paid to the contractor, but the contractor’s remobilisation costs (to start up again) will be an important financial factor. In addition, and perhaps more importantly, developers should check the contractual suspension provisions to see how long the contractor has agreed to hold its original price. Any contractual fluctuation provisions should also be considered. Clearly, a change in price will be a further cost to take into account.
Changed your mind?
This quiet period will have given developers an opportunity to reflect on what they are going to build.
Given that most companies have had to make significant operating cuts during the past few years, it is unlikely that many will be looking to move to glitzy new headquarters. Additionally, given the decline in demand for commercial property and the consequent fall in values, it may be that you no longer want to (or can afford to) build what was first proposed. Indeed, the whole development may simply be unviable in the current market, as a result of difficulties in securing funding or securing the necessary pre-lets.
There are planning considerations too: we recently carried out a survey of developers and local authorities on this very issue, and it was clear from the responses that many planning authorities were willing to renegotiate section 106 agreements where questions of viability were hindering the delivery of a project.
Although most building contracts allow for variations to the proposed works, a decision as to how the works are to be varied (and the consequent adjustments to building programme and contract sum) is best made before works under the original contract are resumed, or a new contract is signed.
If the contractor has to be replaced, there will inevitably be liability issues to resolve: design liability and responsibility for defects spring to mind. These liabilities are not easily transferable, particularly with the passage of time and a particularly cold and snowy winter taking its toll on what has been built. A new contractor (and its insurers) may be happy to take a novation of existing sub-contracts and appointments, and to accept the liability for existing works and design under their new contract. However, there will certainly be an increased cost for accepting this risk.
It is also worth considering the various insurance products that can help to bridge the liability gap, such as latent defects insurance, which can provide additional protection in these circumstances. This type of insurance isn’t cheap, and most, if not all, insurers will want to review the designs and inspect the works in the ground. However, it is an important factor to consider in dealing with prospective funders, tenants and investors, particularly where there may not be a full package of warranty protection.
Most of the issues considered above apply equally to the professional consultants. Given the events of the past 18 months, anyone entering into an appointment or building contract will be sensitive to the impact that the global financial markets can have on their business. I think it likely that more attention will be paid to clauses dealing with the consequences of suspension in the future.