Real estate development

A thorough survey of a development property prior to purchase will reveal any risk factors that might be involved. Such a survey can help a developer to become acquainted with any conditions that might be crucial to the way the project is implemented and its overall cost. For example, the developer must be fully aware of any existing restrictions affecting development (civil law easements), and also how official planning documents might impact on development of the property in question. Such restrictions will determine that which may legally be erected on the plot, and how much time will elapse before the first spadework can begin.

Due partly to direct and indirect taxation requirements, development property is often acquired through shares or equity in a company that holds right of ownership to the property in question. Acquisition of a company provides a basis for carrying out a due diligence of the company as well as the property. Such inspections are necessary in order to clarify the rights and duties associated with the company. It is therefore important that due diligence be conducted.

When a developer has purchased a property and entered the project design phase, the organisational model must be chosen: whether, for example, the property will take the form of a housing cooperative, owner-occupied housing association or whether each unit will be assigned separate land and title numbers. The organisational model can also impose limitations on the type of residential units that can be erected, and who may purchase them. Parking spaces, garage design, and the potential use of investment property are also planned during this phase.

A property project may be of a size that makes it practical to schedule it in several construction phases according to economic and market considerations. In this context it is also necessary to plan for a common infrastructure, as well as access, water/drainage, and energy facilities etc.

Furthermore, the developer has to secure necessary control over the remainder of the development property once the first units built have been transferred to the buyers.

Good communication with the planning and building authorities is important. It is they who, on the basis of the application process and the regulations governing this, declare whether a building project is legal. A solid knowledge of such processes and regulations, as well as the scope permitted in implementing a building project, is therefore of great importance.

A development agreement is a contract entered into by a municipality and a private developer in connection with planning and building projects. Such agreements are relevant for greenfield developments as well as for inner city and city centre renewal and redevelopment projects.

The agreements between Oslo municipality and landowners at Ensjø, and between Bærum municipality and the ownership interests at Fornebu are prominent examples of such.

The objective of a development agreement is usually to determine which of the parties, municipality or developer, shall be responsible for implementing the necessary public infrastructure measures such as roads, main pipelines for water and drainage, storm water run-off, and communal areas such as plazas and parks. It also specifies how the costs of such measures shall be apportioned.

Contributions by the landowner towards the developing the social infrastructure, such as day-care centres and suchlike, are as a rule forbidden. The Ministry of Local Government can in special cases grant exemption from this ban, but there are few examples of this.

The provisions governing development agreements are set out in Chapter 17 of the Building Act (2008) and its associated regulations.

A development agreement concerns the implementation of a plan for municipal land use, most frequently a zoning plan, usually taking as its basis the plan’s sequential directives, which describe the public infrastructure measures that must be taken as a condition for a residential or commercial development. The planning process and negotiation of the development agreement very often take place in parallel, but it is also customary for the development agreement to be negotiated later and that the link with the directives in the regulatory plan is less distinct.

By the agreement, the developer may himself be obliged to carry out the infrastructure measures (specific performance), or meet the costs of these through payment of a cash sum. Or he may discharge his obligation by means of a combination of the above. The duties imposed on the developer by the agreement must be necessary for the execution of the plan, and the measures must be reasonable and proportional. If the essence of these requirements is not crystal clear, then a conflict may arise. In cases involving development agreements brought before the courts or the Parliamentary Ombudsman, questions regarding the necessity and proportionality of the landowner’s performance have been key issues.

The duties imposed on a developer in an agreement must be necessary for the execution of the plan, and performance of them must be of a certain reasonableness and proportionality.

In a development agreement it is usual that the parties agree as to how they should deal with the value-added tax levied on the costs of building, with a view to lessening its impact where possible. The model selected for this depends on whether the developer is entitled to a deduction (for a commercial or residential property), and on the role the municipality wishes to play in the development.

One must differentiate between different variants of the agreement: the VAT-adjustment model, and the building project contribution model (with the so-called Valdres model as a sub-variant of this).

VAT-adjustment is used when the developer is also the builder responsible for the infrastructure measures; if the building project contribution model is applied, the municipality is responsible for these measures and the developer makes a cash payment to the municipality.

Chapter 17 of the Planning and Building Act stipulates the rules governing the development agreement process. These include the requirement that the negotiated agreement proposal be made available for public inspection, and that acceptance by the municipality may only take place once the plan for land use has been passed. The agreement may not be appealed. The developer may, however, seek to have the validity of the agreement tested by the courts.

Dalan’s specialists have broad experience of negotiating development agreements, for both municipalities and for private parties.

The choice of contractor and type of contract can be of importance for both the total price and for the control the developer can exercise over the project. The law as it relates to construction contracts is largely non-statutory and based mostly on the use of standard contracts.

There is no easy answer to the question of which type of contract one should adopt. This choice depends on a specific appraisal of the complexity of the project itself, the developer’s expertise in managing and monitoring a project, and the use of professional advisers etc. In many cases, the developer will place great emphasis on risk reduction when selecting the contract type. A building project is a complex undertaking, both in a technical sense and with respect to the laws and regulations that must be complied with. It is therefore important that the developer mobilises the necessary resources when preparing the building process, including the contractual regulation of the building work.

When building for consumers, it is important that the developer meets the requirements of consumer protection legislation with respect to marketing, collateral, and cancellation terms etc. In this connection, the developer should ensure that back-to-back contracts safeguard the liability for claims the developer has vis-à-vis the consumer.