Housing association development agreements - the devil is in the detail

13 May 2020

Article updated to 13 May 2020 and is not a substitute for legal advice; nor should it be relied upon as constituting legal advice.

For many housing associations one of the key ways of delivering new homes is partnering with housebuilders and taking the allocation of affordable housing on new estates. The contracts for these are usually bespoke sale and development agreements.

What is the impact of the COVID-19 crisis on these contracts?

Current government guidance is that those who cannot work from home should return to work and there has been a particular focus on the construction industry. However any return must be done safely observing social distancing rules. Many builders have chosen to return to work, but social distancing coupled with supply chain issues and problems with staffing levels due to workers unable to work because of health issues and family circumstances, means slower delivery and delays.

This has created two unique sets of problems for housing associations. Firstly what do to with those builders who downed tools or cannot deliver on time; are they entitled to an extension of time to deliver the homes? Can they terminate the contract and walk away? Are builders entitled to charge for the delay? Are housing associations entitled to compensation?

Secondly what to do with those builders still working. Can housing associations refuse to attend site meetings or take handover of completed units?

As such contracts are bespoke, unfortunately the devil is in the detail and as such, this article considers what is the industry standard and usual practice.

Most contracts incorporate provisions allowing for extension of delivery dates in force majeure circumstances or where there are shortages of labour or materials. Force majeure is an alien concept in English law and much will turn on the exact wording of the clause i.e. whether it mentions epidemics, pandemics, government action or civil emergency. However in our experience the majority of contracts allow extension either due to the force majeure wording or similar, sometimes indefinitely, with others to a fixed long stop date.

The payment of compensation (generally LADs or Liquidated Ascertained Damages) is linked to delivery by a fixed date. Given most contracts allow extension it is unlikely that housing associations will be entitled to compensation, at least in the short term. Helpfully though almost universally contracts are for a fixed price and do not allow builders to charge associations more if they experience higher prices due to shortage of materials or labour.

What about termination of contracts? At the outset of the crisis concerns were around housebuilders downing tools and walking away - especially those in precarious financial positions. Here the outlook for housing associations is more promising, as almost universally there are no rights for a builder to do this. They can generally only terminate if the association itself breaches the contract (so look carefully at any invoices raised by the builder and make sure all are paid in time) or it goes bust.

As the lockdown continues, housing associations may wish to terminate contracts themselves and take over delivery. Whether the courts would look kindly on this depends on what the builder has done to mitigate any delays and if the builder is past a contractual long stop date. Where a long stop date has passed, then it is much easier to bring the contract to an end.

Before a long stop date has passed it is a question of whether or not the builder has breached the terms of the agreement, or in some circumstances is unreasonably delaying or not performing their duties. This is more problematic; given the government's initial mixed messages on staying at home, whilst allowing construction sites to stay open, it is difficult to predict how a court would look at this.

So what about those contracts that have been performed? Can a housing association refuse to perform their part of the bargain as employees may not wish to visit sites? Unfortunately the answer is generally no meaning that site meetings can be called and dwellings once complete handed over to associations, even if they themselves then cannot let or sell them on. Here early dialogue with builders is essential to see if site meetings can be carried out remotely or units delayed.

On the specific point of handover, of course it is not just physical completion of the units that the contract requires, but satisfaction of planning conditions, provision of warranties and building regulations sign off. So if a builder does not wish to work with a housing association it may be worth looking at the detail of such clauses to see if handover can be refused.

In conclusion

At the date of publication, whilst the Government has published it's roadmap for a return to normality, there is no immediate prospect of the COVID-19 crisis coming to an end. Our advice is that housing associations take prompt steps to review their contractual obligations and take action to reduce any risks.

If you have any questions or require advice, please contact contact Emily Groom or Pete Goddard or another member of the Social Housing team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2020.