Authors: Margot King and Samantha Gou
Project Development Agreements (PDAs) are often used in urban regeneration and other development projects; they allow the government landowner to keep control of the precinct development and allow the developer to defer payment and land acquisition. Their implementation over the project lifecycle means that clauses will be tested, as will the relationship between the parties. It is important that the PDA is carefully negotiated and drafted to avoid pitfalls during project implementation.
Partner, Margot King, and Senior Associate, Sam Gou, set out their top ten PDA tips.
In preparing a PDA, it is important to bear in mind that it will operate over a long period of time and referred to regularly in implementing the project, not simply put in the bottom drawer. The document needs to stand the test of time. Sometimes, in a bid context, the opportunity to make changes to the bid PDA is limited and risks need to be prioritised. This is our take on the top ten tips for developers entering into PDAs.
1. Right to land transfer must be clear (make sure the land to be purchased is clear and the put and call option mechanics are clear)
In a PDA, typically the developer acquires the interest in the land during the life of the project through a put / call option mechanism rather than upon entry into the PDA. Deferred land acquisition delivers cashflow benefits to the developer because payment for the land can also be deferred until a point in time closer to completion of the development. However, it does carry a completion risk. It is essential to make sure that the call option and put option work, that the dates for the start and finish of the call and put option periods are clear and based on objective events, that any conditions precedent can be satisfied and are within the control of the developer and that any template contracts for sale attached to the PDA will effectively transfer the land. The land to be bought and sold should be clearly described or indicated by reference to a draft plan of subdivision.
2. Pre-existing site conditions (potential for delays and cost blow outs: condition of land, contamination, existing infrastructure, new infrastructure, environmental, native title and heritage)
The developer will typically assume risk on the condition of the land. If the site is contaminated it is important to properly risk assess the extent of the contamination and if possible contain the risk – for example, by monetary cap on developer expenditure towards remediation or by defining the land area that the developer must remediate (including drafting for the possibility of leaching contamination).
Other site condition risks include removal of unknown existing infrastructure, discovery of relics and heritage items and geological risk. All of these can delay the project with consequences at different project interfaces. Time and cost caps can also help mitigate or limit these risks.
In May 2019, the NSW Government released the consultation draft ‘Interactive Tendering Guidelines’ (Guidelines) for use in large scale construction projects and public private partnerships. The NSW Government has indicated it wishes to adopt a more collaborative approach early on in the procurement process so there is an opportunity for refinement and information sharing with proponents on topics the Guidelines refer to as ‘interactives’. These are typically:
design / technical specifications;
legal framework and the State’s proposed risk profile; and
key commercial issues.
The intention is that site condition and project specification surprises are avoided to allow for better risk allocation and pricing based on information that has been shared and refined between the parties.
3. Reimbursements or payments from the government landowner (make sure that obligation and timing of reimbursement/payment is clear to mitigate cashflow risk)
Often PDAs will include obligations on the developer to carry out certain works for the government landowner with the developer claiming payment from the government landowner for those works. The payment claim mechanism needs to be absolutely clear to minimise risk that the payment claim is disputed and to ensure that payment is received on time to avoid cash flow consequences for the developer. It is not always clear that a PDA is a ‘construction contract’ for the purposes of Building and Construction Industry Security of Payment Act 1999 (NSW) and this should be considered further at the time of preparing the PDA.
4. Milestones, delays and extensions of time (ensure that extensions of time (EOTs) are wide enough to cover non-compliance or failure to give approvals)
PDAs will generally include milestones and all the usual EOTs for delays in completing the project. EOTs should be wide enough to include PDA non-compliance or action or inaction by the government landowner. An EOT for breach of contract will not necessarily help as the inaction might not strictly be a breach or the breach might not be established court. In any case, the developer is unlikely to want to litigate a breach except as a last resort.
