We are often asked by our developer clients about the benefits of interposing a developer entity between a land owning entity and purchasers in a development.
There are many benefits of using a developer entity in development projects.
Under this commonly used structure:
– the land owning entity will be a party to the contracts of sale with purchasers and its sole obligation will be to transfer dwellings to purchasers on completion.
– the developer entity (usually, a newly established SPV for each project) is also be a party to the contracts of sale with purchasers and would bear all liability to purchasers in respect of the completion of the development and rectification of defects.
The benefit of this structure is that development risk is isolated on a project by project basis as:
– the developer contracts with consultants, the builder and other contractors;
– the developer is the primary borrower of construction finance; and
– the developer is responsible for resolving defects with purchasers post settlement.
The land owner’s liability is substantially diminished because it does not have on-going liability to consultants, builders, purchasers etc. (this rests with the developer entity).
This structure can be especially beneficial in circumstances where a developer client holds all of its land/development sites in the same land owning entity as the risk of the land owning entity being sued is reduced which in turn reduces the risk of one valuable project or landholding being exposed to liability which arises from a builder, consultant, purchaser or other third party on another project.
The introduction of the economic entitlement duty some 2 years ago threatened to extinct the use of this structure by a related land owner and developer, but there remains merit in using it so long as no more than a commercial fee is charged by the developer for its services.