Identifying the potential risks involved in developing property will prepare you for what's ahead.
Blogger: Rolf Howard, managing partner, Owen Hodge Lawyers
The greater the risk, the greater the reward. Nowhere is this more true than in the field of property development. But as every developer knows, the real secret is in managing the inherent risk.
Identifying, avoiding or mitigating legal risk can be complicated, though, because of the many different shapes a development scheme can take. The renovation and release of existing commercial buildings presents different challenges than a project that begins with the purchase of raw land or one that involves off-the-plan sales.
Nonetheless, three basic techniques may protect the anticipated rewards of any project. Due diligence, water-tight contracts and insurance are the property developer’s best friends.
What are the legal risks?
They are nearly infinite, of course, but the more layered the legal structure of the developing entity, the financing plan and the method of transfer, the more that can go awry.
Developers should anticipate many layers of legal compliance. To name just a few:
Finally, legal disputes, whether with a builder, supplier, lender or investor can stall a project and run up costs. The same is true of litigation with the end tenant or purchaser. Recently proposed legislation in NSW to limit the use of 'sunset clawbacks' would further limit developers’ ability to manage market risk.
What are the remedies?
The first, and most important tool that property developers have to mitigate legal risk is due diligence. Undertake a thorough document review and research at the earliest stages of a deal. Otherwise, there is simply no way to know what the risks are. This is where a good property lawyer should earn his or her fee, rather than in the litigation that may follow from inadequate due diligence.
Most of the relationships in a property deal are defined by contract. It is important to understand the terms of the contract. It is also vital to negotiate protective provisions including indemnity clauses, perhaps backed with insurance, or methods of dispute resolution that will reduce the financial risk of litigation.
Investors and lenders will require appropriate insurance cover, but other forms of coverage may be necessary to protect buyers and workers. A thorough legal and financial review should spot those additional needs.
Property development is speculative and, by definition, includes a measure of risk. Anticipating and mitigating legal risks can do a great deal to increase the potential for a handsome reward.