New Build Properties – Understanding How Construction Works
One of the fascinating things about construction is that the huge majority of new build properties, both residential and commercial are built using completely standardised building practices. Despite the uniformity of the process, most people have no idea what construction is, what the process of actually involves and how it ties in with new build properties when buying one.
Usually, when a property development company purchases a plot of land, its goal will be to develop the land as promptly as possible and make a profit. Take a retail developer, who may take a plot of bare land on the outskirts of London and constrict a retail park there so that it can let out or sell units to various tenants. This retail developer or its successor will then be able to make an income from the property in the form of rent, or the purchase price, as well as seeing the capital value of the land rise, due to the fact that it has now been turned into a fully-developed income producing site.
Once the land is developed, the developer may choose to hold on to the site or it may agree to sell it to an institutional investor, such as a pension fund. Regardless of what it chooses to do with the site, the developer’s concern will be to get the end result up and running as soon as possible so that the site can start generating an income.
Therefore, subject to obtaining the requisite planning permissions and building regulations, the developer will do everything in its power to arrange for the construction of the new build properties, whatever it may be, to commence as soon as possible. Some, more cautious developers, choose to sell or sign tenants up to take leases of the properties before construction work even begins. This way, they are likely to be certain that it is worth spending the money on the development. This may also be a requirement of any funder, who will want reassurance that rental income will be available to pay off the loan.
Understanding how Developments are structured
Generally, there are many different parties involved in the design and construction of newbuild properties. Every party has their own role and there are many different ways in which these parties may contract with each other. In order to understand and be able to choose the method that is right for you it’s essential to differentiate between the two main contractual structures: the Traditional Method and the Design and Build Method.
The Traditional Method
In a Traditional Method, the owner of the property, most commonly referred to as the ‘employer’ will engage an architect to design the development by entering into a deed of appointment with them. The employer will then enter into a building contract with a building contractor and instruct them to carry out the construction works. The details of the architect’s design will be set out in specifications and drawings annexed to the building contract. This ensures that the building contractor is bound to build the development in accordance with the architect’s design.
Similarly, the employer will also appoint the professional team, by entering into deeds of appointment with them and may also engage various sub-contractors by entering into sub-contracts. Sub-contractors could be anyone from scaffolders to roofers, to glaziers.
The advantage of using a traditional method is that it allows the employer to retain full design control and therefore control all the specifications of the build. However, the downside is that because the design is controlled by the employer and the actual build is controlled by the building contractor, if there is a defect in the building there will always be a risk of a dispute arising, as to whether this defect has been caused by poor design or poor workmanship.
Over the years, the use of the traditional method has been becoming rarer and is now only used where the employer wants to maintain control. For example, the Manchester University built new laboratories and student accommodation blocks employing this method, as the governing body of the university wanted to retain tight control over the build.
The Design and Build Method
In contrast to the Traditional Method, the other type of contract which an employer can choose to use is a ‘Design and Build’ contract. This type of contract entails the building contractor, rather than the employer, being responsible for all the design and the build. The employer will still employ the architect to carry out the initial designs for the building, in order to make the planning application. In turn, depending on how detailed the designs are, the employer will often also enter into deeds of appointment with the professional team, as their expertise will feed into the design. Finally, it will then employ the building contractor under a building contract.
However, once the building contractor is signed up, the architect’s and professional team’s deeds of appointment will be novated from the employer to the building contractor. Once the novation has taken place, it is the building contractor who has a direct contractual relationship with the architect and the professional team.
Most employers will require collateral warranties from the novated architect and members of the professional team, either built into the novation agreements or as separate documents to retain a contractual connection and protect their position. This is because a buyer or tenant of a newly constructed property will want some reassurance in case there is a problem with the building. Whilst in both types of contractual structure, the building contractor, the architect, the sub-contractors and professional team will each give a separate warranty to mortgagees, future buyers and tenants, in a design and build contractual structure, the architect, the professional team and the sub-contractors will also each give a separate warranty to the employer. The sub-contractors will then be appointed by the building contractor through subcontracts.
Essentially what the design and build method does is give final control of the design and build to the building contractor. This simplifies the employer’s job because they will have to deal with only one point of contact for the project. It is also the case that funders will find this method more attractive because there is less potential for disputes arising. On the other hand, there is a risk that because the building contractor is the one in charge of the design, it will be difficult and more expensive for the employer to request subsequent alterations to the design.
Another consideration to bear in mind is, depending on how early in the design process the building contractor gets involved, there is potential for the building contractor to cut corners on the design to save on the build cost and therefore increase its profit margin. This is something that the employer must be aware of and be willing to risk when giving up control over the works. All new build properties must be built to approved standards to ensure appropriate build sign of warranties are provided on completion – something which is a mandatory condition for mortgage lenders.
Understanding how developments are structured is crucial prior to commercial construction, so as a starting point, employers needs to give a great deal of consideration to the amount of control they wish to retain or give up. It is also helpful to understand the mechanics involved with new build properties if you are considering to lease or purchase one.
If you are considering buying land to redevelop it to make a profit, feel free to talk to us about your plans so we can help you with any legal advice you may need.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.