What is a joint development agreement?
Imagine that you have a plot of 500 sq. metre and only 1 floor is developed.
The builder wants to create a 4-storey building and sell 8 flats in this. He will give you 2 flats out of this.
This is permitted under municipal bye-laws where you reside.
How will this work be done?
A joint development agreement will be needed.
Here are some important clauses in the agreement. We will cover both US and Indian perspective.
1 – Responsibility of the developer
How do you define the role of the developer?
Developer has the authority to develop 8 (eight) apartments of ___ sq feet super built up area.
Developer shall also promote and find buyers for 6 apartments. 2 apartments shall be owned by the Owner.
Developer shall have the following responsibilities:
- To finance the project and obtain funding from third party lenders if necessary
- To execute contracts with third party contracts to construct on the land
- Promote the project and find potential buyers and determine the sale price
- To comply with all municipal bye-laws, and all laws and regulations for the construction and sale of the project
It is clarified that title is not conveyed to the Developer.
Here is a US version from the SEC website:
Owner hereby retains Developer as, and Developer hereby agrees to act as, the developer for the Project and to develop, organize, supervise, monitor and manage the Project, subject to and in accordance with the terms of this Agreement.
2 – Grant of license to develop by owner
The Owner grants the Developer a license to enter the land, construct on the land, and fulfil obligations under this Agreement.
The Owner shall execute a power of attorney to this effect.
Here’s another version.
The Primary Developers grant the Developer the entire development rights over the project land, including the right to develop and transfer the project land.
Try to draft a version.
3 – Consideration and benefits for both the parties
There are various methods of payment of consideration:
- There could be an upfront payment of the project cost. E.g. If development cost is 20 cr, then 10%, or 2 crore may be an upfront payment to the developer.
- The full revenue of certain apartments sold could be retained by the developer. The owner only gets the flats.
- Profit share of the total sale receipts (after deducting certain pre-identified categories of expenses as per a budget)
Here is a US clause:
Development Fee. For Developer’s services in connection with the development of the Project as set forth in this Agreement, Owner shall pay a development fee (the “Development Fee”) to the Developer in an amount equal to 3% of the final Project Budget.
You will need to add in timelines for payment of such fee.
Try drafting some timelines in chat.
Also, draft a clause where revenue will be shared in the ratio of 70%:30% between Developer and Owner.
You can also do a profit share arrangement. But how do you ensure that the developer does not inflate the costs, since he will be incurring all costs?
You can define these terms and allow certain costs as per a budget.
Here’s an example from a US contract:
Allowable Development Costs” means, collectively, the costs and expenses associated with the acquisition, development, construction, ownership, operation and maintenance of the Project through Completion to the extent provided in a line item included in the Project Budget.
4 – Consequences of delay in construction or completion of project
What is the consequence of delays in construction?
If completion of construction is delayed or relevant approvals to occupy the property are not obtained by more than 90 days beyond the construction deadline of ____, the developer shall forfeit 1% of his share per month in favour of the Owner.
5 – Interim arrangements for owner
In case of residential property that is being demolished and redeveloped, an interim arrangement for Owner’s accommodation must be made.
Developer shall provide Owner a rent free accommodation of 2500 sq. ft. carpet area in the locality of ___, for the duration of the project, until the apartments for the owners are ready.
6 – Cooperation between the owner and the developer
A general cooperation clause is needed.
Owner will need to allow the Developer to enter the land, and will also execute sale deeds with the buyers identified by the Developer.
Similarly, the Developer cannot disproportionately inconvenience the owner.
Here’s a general cooperation clause:
Developer and Owner shall cooperate in good faith with each other to ensure successful achievement of the outcomes of this Agreement.
You can also give specific examples of cooperation if needed.
7 – Termination clauses
If you are acting for the land-owner, you can trigger terminations under the following circumstances:
- Developer not complying with applicable norms.
- Developer not completing the project within, say 6 months of the deadline.
- Developer abandoning the project or not making progress as planned.
- Developer not being able to obtain finance.
In such cases, the landowner can appoint another Developer and no consideration will be payable to the Developer.
Try drafting this clause on your own.
Apart from the above clauses, there are general boilerplate clauses for delivery of notices, anti-assignment, representations and warranties from both sides, etc.
We will not go into that here.
Here are some issues that typically come up with respect to JDAs:
- Raising finance from 3rd parties – builder does not have title and will need the land owner’s cooperation if this has to be done.
- Execution of financing documents between bank and builder and mortgage deeds between owner, builder and bank.
- Determination of stamp duty in connection with the JDA and subsequent sale of flats.
- RERA registration issues, if the plot size and number of flats meet the eligibility threshold under RERA.
- Execution of power of attorney.
- Delays by the builder in construction or obtaining permissions.
- Builder not furnishing the kind of alternative accommodation promised, or inflating costs to earn a higher revenue share.
- Quality of work in owner’s flats being of lesser standard in comparison to those which are for sale, etc.
For this reason, you need to have appropriate dispute resolution clauses and appropriate clauses for termination and appointment of an alternative developer to complete the contract.
If the landowner does not cooperate with the developer in any of the issues as agreed between them, the developer has the right for specific performance of the contract.
On the other hand, if there has been a breach of the terms and conditions of the JDA by the builder, he would have the right to revoke the power of attorney executed between the parties.
How was it? What did you learn?
As we said before, it is not necessary for you to remember everything. If you get a sense of how to go about this, it is a sign of progress.
With more time, training and practice, you will get better.