Development Agreements

Introduction

The real estate industry is one of the biggest industries in India. India contributes to around six to eight percent of the world’s GDP. The Indian government employs more than 50 million people, making it the third largest employer in the country. The real estate industry in India is set to reach a market size of $1 trillion US dollars by 2030. You may be wondering why so many people are investing in this steadily-growing industry.

In India, most people interested in the real estate industry invest in three major forms- residential rentals, commercial or industrial real estate, and vacation rentals. Another profitable option is to jointly develop the land with the help of a developer. A development agreement is entered into for that very purpose. It facilitates both the land owner and the developer to mutually satisfy their needs. Let’s dive in to know all about development agreements.

What is a development agreement ?

A development agreement is also called a joint development agreement. A development agreement is a contract between the land owner and the developer. It allows the landowner to transfer ownership of the land to the developer. The developer takes possession of the land and can build on that land. If the land owner doesn’t get a specified portion of the developed property, or if he gets a portion of the profit as opposed to a lump sum, the landowner will receive a fixed fee instead of a share of the profit.

Illustration

Let’s understand the concept of development agreements with an illustration. Mr A purchased a piece of land in Kanyakumari. Pondering the best way to use the land to get the optimum profit, he listed out the following options before him:

Firstly, to construct a residential or commercial building and then sell or rent it;
Secondly, to lease it; and
Lastly, to wait for the golden opportunity for the price of the land to reach considerably high and then sell it off.

However, none of the above options satisfies him, as he doesn’t have enough funds for construction. Further, his lack of requisite expertise to get the required approvals is hindering him from constructing residential or commercial buildings on his land. Mr A also doesn’t want to go with the last option of waiting for the peak of price-hike, as it’s highly uncertain and time-consuming.

Meanwhile, Mr B is a reputed industrial developer, who wants to develop a residential property in Kanyakumari. He has the right expertise in getting construction approvals and managing the construction activities. However, considering the trend of the exorbitant prices of land in Kanyakumari, he only has funds enough for the construction. He doesn’t want to buy a piece of land first and then develop it.

So, Mr A and B come together and agree that Mr A will contribute his land and Mr B will develop the land into a residential property. The deal is that while Mr B gets the requisite approvals, pays for the construction, manages the construction activities, and takes care of marketing the land, Mr A will have no responsibility for the development. All that Mr A has to do is sign an agreement and give his land to Mr B’s control, in return for a share of profits arising out of the constructed property. This agreement is called a development agreement.

Why is a development agreement needed ?

Real estate development agreements are common in the Indian real estate industry.

It is important to know more about the construction process if you wish to construct a house. For example, when an owner of land wishes to sell it to someone else, it will help to know what kind of construction work and other formalities are needed to sell the land.

Development agreements between the developer and landowners can be mutually beneficial. Developers can offer higher prices because the developer owns the rights to the land and also has the financial ability to develop the land. Land owners receive tax breaks and the opportunity to realize the maximum potential of their land.

This is an advantageous arrangement for the land owner. Depending on the terms of the development agreement, he can easily get ready cash for his land, while the developer gets to develop the land and make a profit out of it without having to buy the land.

Types of development agreements

In general, there are two types of development agreements- area sharing development agreement and revenue sharing development agreement.

Area-sharing development agreement

An area sharing development agreement is an agreement wherein it is agreed that the developer will construct on the land owner’s property using his money and expertise, and in return, the land owner gets a specific portion/ ratio of the developed property.

Illustration

Let’s understand an area-sharing development agreement through an illustration.

Mr A is the owner of land measuring 1 acre. Mr B is a real estate developer. Mr A and B enter into an area-sharing development agreement. According to the terms of the agreement, Mr B must build 5 villas on Mr A’s land. In return for providing the land, Mr A gets one of the newly developed villas.

Revenue-sharing development agreement

In a revenue-sharing development agreement, the land owner and the developer agree that while the developer constructs upon the land owner’s property using his money and expertise, the land owner, in return, gets a specific share of the revenue generated by selling the developed property.

Illustration

Let’s understand this with the help of an illustration.

Rights and duties of the developer in a development agreement

The following are the rights and duties of the developer in a development agreement:

Rights

Right to acquire General Power of Attorney

As aforementioned, the developer is not eligible to sell the property developed under the development agreement, as the title still remains with the land owner. However, it vests on him the right to develop as well as market the property. In such a situation, the developer is entitled to sign a GPA agreement with the land owner, which allows the developer to sell the property on behalf of the land owner. However, it is the land owner who has to grant the conveyance deed in favour of the buyers of the developed property.

Licensee rights

The developer agreement operates as the license-mandated under Section 52 of the Indian Easements Act, 1882 for the developer to enter into and develop the land owner’s property. So, under a developer agreement, the land owner is the licensor and the developer is the licensee. The licensee right of the developer allows him to legally carry on with the development even if the land owner refuses to let him into the property (let’s say in case of dispute).

Right to develop

The very purpose of signing a development agreement is to vest on the developer the right to develop the property. Through the developer agreement, the land owner authorizes the developer to carry out the developmental project on his land. The development may be in the form of converting the land into plots, constructing residential or commercial buildings, etc.

Right to seek requisite approvals

Construction activities involve acquiring numerous approvals and compliances from several government departments like Municipal Corporation, Central Ground Water Board, State PWD, etc. The development agreement entitles the developer to seek such approvals required to develop or construct on the agreed land.

Duties

Bear the developmental costs

The development agreement bestows on the developer the duty to bear the costs of all the activities required to develop the land in the agreed way. It includes the costs of getting approvals, construction, transportation, landscaping, marketing, etc. The land owner’s duty ends by merely providing the land by signing the developer agreement.

Property marketing

The developer is responsible to advertise the developed property, finding the right prospective buyers, negotiating the price profitable to both himself and the land owner, and selling the property at the right time.

Acquire the required approvals

As aforementioned, the development agreement vests on the developer the exclusive duty to acquire the required approvals and compliances from respective authorities to legally develop the land.

Key clauses of a development agreement

The following are the key clauses of a development agreement:

Recitals

A recital is the introductory part of any agreement, which explains the purpose of its making. In a development agreement, the recital may state that the developer intends to build residential buildings on the land owner’s property, and the land owner intends to provide his land to the developer in consideration of a specific share of the revenue accrued.

Parties clause

The ‘parties clause’ is common in almost all agreements. It specifies the name and residential (if the party is a natural person) or corporate address (if the party is a corporate entity) of all the parties involved. In a development agreement, the parties clause will specify the name and addresses of the developer and the land owner.

Property clause

The ‘property clause’ gives a detailed description of the land owner’s property for the development of which the development agreement is entered. It sketches out the exact location and dimensions of the agreed property. A map of such property’s location is often annexed with the developer agreement.

Scope of work clause

As the name suggests, a ‘scope of work clause’ elucidates the work that each party undertakes to perform during the term of the agreement. In a development agreement, this clause majorly specifies the kind of development activity that the developer undertakes to do with the property. It may be turning the property into well-distinguished plots, residential or commercial areas, etc.

Consideration clause

The ‘consideration clause’ clearly specifies the consideration received by the parties. In an area sharing development agreement, the consideration received by the land owner would be a specific portion of the developed property. In the case of a revenue-sharing development agreement, the consideration would be a specific ratio of the revenue accrued after selling the developed property.

Representations and warranties clause

The ‘representations and warranties clause’ is one of the most important clauses of any agreement. Along with specifying their rights and obligations, it also contains the declarations of the parties. In a development agreement, usually, the land owner-

Affirms (declares) his title and ownership over the agreed property;
Agrees not to grant a lease, mortgage, etc. during the term of the agreement without the prior consent of the developer;
Undertakes not to cause unwarranted hindrance to the developmental activities during the term of the agreement;
Grants exclusive license to the developer;
Agrees to execute a GPA agreement in favour of the developer, etc.

Simultaneously, the developer usually-

Undertakes to obtain the required approvals from relevant authorities;
Elucidates his plan for developing the property;
Undertakes to execute his developmental plan;
Undertakes to bear the developmental costs;
Undertakes to manage the construction activities, etc.

Term and termination clause

The “termination clause’ specifies the agreement’s duration. In case the developmental work is unable to be completed within such duration due to valid reasons, the term may be extended. The parties can extend the term by mutually signing addendums to the original agreement.

Governing laws and jurisdiction clause

As the name suggests, the ‘governing laws and jurisdiction clause’ specifies the law (for example Indian laws) that govern the particular agreement and the court which has the exclusive jurisdiction to deal with it.

Dispute resolution clause

The ‘dispute resolution clause’ specifies which dispute resolution forum the parties may approach in case any dispute arises. Generally, the parties go for arbitration.