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Ask the team: is a development management agreement caught by the Construction Act?

This month’s Ask the team considers what a development management agreement (or development project management agreement) is and whether it is caught by the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996).

Development manager

Experienced developers can help a landowner turn an unused or under-used site into a profitable new scheme. In chastened times, anecdotal evidence suggests that some of those developers are a more common feature on others’ commercial projects, acting as a development manager.

A landowner wishing to appoint a development manager typically enters into a development manager’s appointment (or development management agreement), sometimes also referred to as a development and project management agreement (DMA or DPMA). The exact scope of these agreements varies from project to project, with some being very similar to a landowner’s development agreement, while others are closer to a professional appointment.

Unlike a typical professional appointment, all or a substantial portion of the development manager’s fee may depend on successful delivery (and sometimes successful letting or sale) of a completed project.

The Construction Act 1996

The Construction Act 1996 requires all construction contracts to include compliant payment and adjudication clauses, otherwise the Scheme for Construction Contracts 1998 will apply. Subject to various statutory exclusions, the definition of a construction contract includes an agreement to provide advice on “building” or “engineering”.

Without rehearsing all of the Construction Act 1996’s requirements and exclusions, when dealing with a property development, where a development agreement provides for the disposal of the freehold or the grant of a lease of 12 months or more (following completion) in the site of the works, the Exclusion Order 1998 applies. That means the development agreement is not a construction contract. The same principles apply if you are considering a development management agreement.

What counts as a disposal?

In Captiva Estates v Rybarn, the court had to determine whether a development agreement was a construction contract. The agreement provided for seven flats to be transferred by the landowner to the developer or the developer’s nominee, if certain specified events occurred. The court referred to the Exclusion Order 1998 and held:

“There are many ways in which parties may arrange for or provide for the disposition of an interest in land or the grant of such an interest. It might be at some time in the future or subject to the fulfilment of some condition wholly within the control of a third party, such as a planning authority, a parent company or a lender. It might be subject to some condition within the control of one or both of the parties being satisfied, such as timely or satisfactory completion of works by the contractor, or the issue of the final certificate by an architect. Such provision or grant could be subject to the willingness of a third party to enter into the transaction or pursuant to a further document to be entered into by the parties.”

In Captiva Estates, the development agreement itself required the transfer from the landowner to the developer or its nominee. The Exclusion Order 1998 applied.

However, it seems to us that where the fee payment to the development manager is effectively triggered by the grant of a lease to a third party, even if the development manager’s appointment required the landowner to grant that lease, then the parties:

  • Are dealing with a payment trigger.
  • Are not making a relevant disposal under the Exclusion Order 1998.

That is, if the landowner’s grant of a lease triggers a payment, even if the landowner is compelled to grant the lease, the parties’ development manager’s appointment is a construction contract. The agreement clearly relates to a situation where there will be a disposal of an interest but it doesn’t “include provision for the grant or disposal” of an interest to a party to the agreement.

Path of least resistance

Given the parties to a development management agreement can provide for adjudication and Construction Act-compliant payment clauses (even if that payment only becomes due when, say, a lease is granted), the safer option in boderline situations may be to allow for the Act. If the parties don’t, and a dispute arises, it may be difficult to make the Scheme for Construction Contracts 1998’s requirements fit with the parties’ payment intentions, making a dispute more complex and difficult to solve.

Practical Law Ask the team

4 thoughts on “Ask the team: is a development management agreement caught by the Construction Act?

  1. Thank you for this helpful brief. Do you happen to have a sample development management agreement or is one in the process of being drafted? These are becoming common now and clients of ours are becoming interested in these type of ventures.

  2. Thanks Daldeep. It is a document we are considering with our colleagues in the Property team, but we have no immediate plans to publish one.
    Part of the issue with preparing a single precedent is (as we say above): “The exact scope of these agreements varies from project to project, with some being very similar to a landowner’s development agreement, while others are closer to a professional appointment.”
    Accordingly, the documents linked to should, we believe, offer a good starting point.

  3. I am looking at a development management agreement where the developer will arrange the sale of the completed unit and once the sale has been achieved will get a performance fee – in other words the agreement will include provision for the disposal of a leasehold interest – this seems to me to fall clearly within para 6 as an excluded contract.

    Your note seems to infer that where the disposal is to a person who is not a party to the agreement it is a construction contract; but there is nothing in the regs saying this – all that the agreement has to do is have provision for a disposal – the inference is that that disposal could be to anyone – as would almost invariably be the case in a development agreement.

    Could you explain the basis for your view?

    Thanks

    1. We weren’t aware of a definitive answer to this question, so our post was all about sharing some thoughts.
      You will need to look at the Exclusion Order itself and satisfy yourself about whether it applies in your circumstances. To take an extreme example, an architect’s appointment that refers to the grant of a lease of more than 12 months of a completed project (to a third party) is not automatically excluded by the Exclusion Order, just because it refers (in passing) to the grant of such a lease. What really helped our thinking when we originally wrote this post was the Captiva case, so that may help you form a view for your situation too.

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