25 April 2005
Much has already been said in the media about the Dundrum Town Centre development. Speculation is rife as to the value of it in the hands of the developer, and more particularly the developer's likely profit. However, few have contemplated the enormous investment made and the huge risk assumed by the developer in taking on such a large project, and the management and policing of the risk is where 'the legals' mostly play out.
For shopping centre developments, there are three main areas of focus:
The tenants: If you build it, they will come?
Here is the scenario: no traders, no rent; no rent, no finance; no finance, no development. So, to minimise the risk, developers will be keen to sign up tenants at the earliest opportunity. Typically, major space users, or 'anchor tenants', sign first and the users of smaller space follow. Some traders are well known to act early, while others adopt a 'wait and see' approach, knowing, perhaps, that space will be offered to them later, when there is greater certainty as to the development timeline and tenant line-up.
The idea of bringing tenants to the negotiating table at anything other than an early stage carries great risk - what you build may not be to tenants' requirements, market conditions may change during the building programme and so forth.
But for how long will a tenant contractually agree to be on the hook to open and trade in any particular development? For the tenant, the earlier the commitment, the greater the chance of events (for example fire) which give rise to delay, which might push the completion of the development beyond a date that the tenant is willing to commit to. It is the job of the tenant's solicitors to square off this and other issues; in rare cases, anchor tenants will seek liquidated damages for developer delay, even if the delay is down to force majeure. The developer will be keen to delegate this responsibility to the contractor, something they cannot do, save by agreement, if the consummation of the building contract for the development precedes the conclusion of the deal with the tenant. Timing is everything.
Another key tenant point is to contextualise the letting - the developer will rarely commit that the entirety of the development will conform to any given plan or drawing. Of course, the irony is not lost on the observer - it is usually that very plan or drawing which has enticed the tenant to the table. The job of the developer's solicitor is to find the middle ground in answer to this and other questions.
Just build it
The second area of legal focus is construction. The dynamic between developer and builder is an ever-topical one. In recent years there have been frequent public airings of views about apparent failures to bring public construction projects in on time and on budget. The focus on both time and budget is as pronounced in the private sector as it is in the public sector.
The developer will want to achieve cost and time certainty while reserving the right to make changes to what is being built, largely to accommodate tenant requirements and other things that inevitably come to light during the construction phase. Cost and time certainty are largely dependent on the degree to which design development is fixed. Therefore, both these certainties are challenged when developer and tenant changes are requested. So, how do you achieve cost and financial certainty while reserving the right to make changes?
From the point of view of cost, for the Dundrum Town Centre development, the balance was found in fixing the price for what was certain in terms of design and in fixing rates in relation to the rest. The problem of time was solved by the imposition of damages for late completion of works, softened by a sensible approach to the circumstances in which the contractor could obtain an extension of time.
Ideally, these and other provisions will interface with the developer's commitment to tenants so that any liability to tenants owing to contractor delay becomes the contractor's liability, and the developer's commitment to the tenants in terms of standard of finish become the contractor's standards.
Show me the money
Then there's the issue of finance. The risk profile of a loan is higher when the loan is in its 'development phase'. The lending margin is typically higher during this phase. To manage the risk, the bank will want to put into place safeguards to allow them to spot early warning signs. So the challenge for the developer's lawyer is to find a compromise between this monitoring role and the requirement of the developer to get on with the job at hand without undue interference. The level of bank control on the letting process, for example, is largely a matter of negotiation, the developer usually being better situated to make the best decisions for the project, and the bank being the one with the money.
Assuming everything runs to plan, the developer will be keen to move the loan out of its development phase as early as possible. The targets to be achieved to do so must therefore be clearly defined.
Outside the main areas noted above are the more unusual agreements needed to ensure the proper and efficient running of the shopping centre. These range from the more run-of-the-mill electricity substation leases and car park management agreements to the off-the-beaten-track television production and licensing agreement.
Michael Walsh is a partner in the commercial property department of BCM Hanby Wallace, adviser to Crossridge Investments, the Developer of Dundrum Town Centre