Housing and Regeneration in Review: Protecting against a sharp rise in development costs31/05/19
Ensuring that provisions protecting the quality of units are adequately drafted in development agreements is becoming more critical than ever, as development costs continue to grow exponentially.
Although the cost of borrowing, costs associated with health and safety risk, and the impact of Brexit may also be implicated, government data shows that the rising cost of materials and components for new house building played a critical role in the sharp overall rise in housing development costs over the last two years. While a 0.3% rise in costs was reported in 2016, costs in 2017 and 2018 rose by 5.2% and 4.7%, respectively.
For a scheme signed in 2016, where prices for materials might have been £2 million, a developer would have expected a 0.3% rise of £6,000. In 2017, however, the cost of materials would have risen by 5.2%, or £104,000. This results in the cost of the materials being £98,000 more than either party expected and leaves the party responsible for the difference scrambling for extra funds.
Who is expected to foot the bill?
The key question, therefore, is who is expected to foot the bill for the difference. A developer can either pass the cost onto the purchaser or use lower quality materials to reduce costs and maintain their returns, leaving the purchaser to pay more than expected or accept a lower quality end product. Neither is an ideal solution.
Planning ahead to mitigate risk
In order to preserve the quality of the units being purchased, clauses must be inserted into the development agreement that either prevent variation of the materials without written agreement of the purchaser or confirm that any variation of materials is the same or higher quality. If the developer cannot find materials of equal quality and value, they should be bound to acquire a more expensive product at no extra cost to the purchaser. Alternatively, the developer may request that in the event of a significant increase the development is put on hold or the agreement is terminated.
We expect that rising development costs will remain a key issue in the housing sector in coming years and in order to alleviate the legitimate concerns of both parties, it is essential that the risks are mitigated prior to entering into contract.
If you would like to discuss any element of this article, or how it may apply to your organisation, please contact Susie Rogers or Rita Saadeh.