Common issues in property development
We’ve explored design development appraisals and much more. People rarely discuss the pitfalls that must be considered when undertaking development. If you saw a property developer, would you think geologist, ecologist, archaeologist, scientist, lawyer, environmentalist, investment banker... the list goes on. We, as property developers, may not be these titles, but we have to work within these realms.
I will be touching on some of the critical issues experienced in property development projects.
Planning is one of the essential considerations in property development. One of the common pitfalls I have found is that some developers demolish buildings without following the correct process. So many things hinge on a building remaining up whilst you secure planning. Firstly, before you demolish a building to bring forward new homes, you must discharge all the pre demolish conditions attached to your planning consent. Demolishing before you discharge your conditions will result in you breaching your planning permission which could land you with a prohibition or enforcement notice. Not discharging your pre-occupation planning conditions will stop you from selling your completed homes, as any good solicitor acting for a buyer will ask for details of discharge notices. Also, there usually are planning conditions and obligations (S.106) that stop you from occupying units, so be sure to look out for these.
Secondly, demolishing a building without submitting the community infrastructure levy (“CIL”) forms means you can’t claim a discount based on the gross internal area of the existing building, and you will be liable to pay the total CIL amount irrespective of whether you were eligible to claim social housing relief. For large schemes, this simple mistake could cost developers millions of pounds. Do not be the one who causes your firm to lose money due to such a simple oversight.
Humans are just one species within this thriving ecosystem called planet earth. We have plants and animals which also have a right to exist within their habitat.
Property development appears to be an easy money earner, but this is far from the truth.
Plants such as Japanese knotweed is a word that generally sends shivers down some of the most experienced developers backs. Why? Because if not appropriately managed, it is a plant that can grow through concrete. To me, I call that plant the devil. When purchasing a site, developers should make sure they do thorough due diligence and understand all the constraints on a site. If in doubt about what to look for, speak to a professional who will help you in that arena. There is a solution to Japanese knotweed, which is either a physical or chemical treatment. Physical remediation involves cutting back the knotweed and containing it within a secure barrier in the ground. The second chemical option will involve spraying the plant twice a year with chemicals to kill the plant. Evidence has suggested that chemical treatment may not completely kill the knotweed and all of the developers I have worked with tend to utilise both the physical and chemical treatments. Also, remember that you could be fined and sent to jail if you improperly dispose of Japanese knotweed. You heard it here.
I’ve always been a fan of Batman, but I didn’t know that bats were protected species under the law when I was much younger. If you destroy a bat roost on your development site, you could find yourself in big trouble; that’s why you must consult an ecologist when you have bats on your site.
In my years working in property development, the most exciting bird I came across was a peregrine Falcon, the fastest bird in the world which reaches a top speed of 200 MPH. If its habitat is impacted, you could end up in prison as stated within Schedule one of the wildlife and countryside Act 1981.
Property development appears to be an easy money earner, but this is far from the truth. There are periods in the year where you can not commence work if there are protected species on your site.
The legal process underpins a lot of what we do in property development. From easements, wayleaves, rights of way, rights of light, restrictive covenants access licenses and contract law. Development managers are expected to have an understanding of all the above and much more. Please don’t fret, the solicitors do the heavy lifting, but to save on fees, it is always sensible to have an idea of what you want to be resolved, as the more you leave to the solicitors, the more you will pay. It saves you money when you know what you want.
The very nature of development is that where a developer may be gaining additional houses, someone will be losing something. It could be light, a route that someone has enjoyed for 20 years or a historic covenant for the benefit of a living individual. There is hardly ever a development where something or some form of legal issue doesn’t crop up.
Before a project commences, my suggestion is to review the title documents to understand any restrictive convents, wayleaves or registered rights of way. Instruct a solicitor to provide you with a report on title, which should identify the main legal issues. Report on titles is my go-to document as it allows me to establish whether I need to secure specialist insurance for restrictive covenants. It also allows me to see if there are any registered rights of way, which will mean I will have to engage with the beneficiary to alter their route should it impact my development aspirations.
On rights of light, this one is an easement directly related to your proposal. If there are injuries (loss of light to nearby properties), there will likely be compensation payable to the impacted parties. Rights of light cases are generally dealt with by a rights of light surveyor and your appointed solicitor. Developers mitigate this by taking out a secret insurance policy (not to be disclosed to any party) which will cover compensation should someone claim. One thing to note is that rights of light claimants can apply for an injunction to stop your development, so do not skim over this issue as it could bring your development to a complete halt.
S.106 and development agreements fit within this subheading, but I will be exploring this in more detail in future posts.
Let’s say when you started your development, you expected your consented home to worth £1m, but due to a downturn and close to the completion of the works, it now is valued at £750k; what do you do? This is one of the common issues faced by developers. This scenario shows the importance of having various options, whether turning the home into a buy to let or finding a cash buyer, slowing down the construction so that the market can recover or complete the works and hold onto it until the market recovers. The most important thing to do is run a scenario analysis of various exit options and ensure that the numbers stack for whatever option you want to consider. The moral of the story is always to have options, whether it be managing a single refurbishment or a significant development. Scenario analysis should be considered constantly until the home is sold.
Before starting a development project and during the process, make sure you keep a live risk/ issues register to keep track of the issues. I have found that it is better to be proactive than reactive. Proactive is reviewing the project as a whole and identifying all the risks by getting comments from solicitors, selling agents, contractors etc. Reactive is just what it says, constantly reacting and not taking any pre-emptive action. In my experience, things become more expensive and pressured when they are unexpected.
To appreciate the opportunities in property development, you have to be able to respect the risks involved.
Finally, development is not a walk in the park; it is more like a baptism by fire. To appreciate the opportunities in property development, you have to be able to respect the risks involved. It is about constantly gazing over the horizon even if the coast appears to be clear.