For landowners considering their options when working with a developer, a development agreement is one of the less well understood structures available – but in the right circumstances, it can be one of the most attractive. This article explains what a development agreement is, how it works in practice, and when it may be the right fit.
What is a development agreement?
A development agreement is a legal contract between a landowner and a developer that gives the developer the right to develop the landowner’s property, in exchange for the landowner receiving an agreed return.
Unlike an outright sale – where the landowner transfers ownership of the land to the developer at settlement – a development agreement typically allows the landowner to retain ownership of the land until specific milestones are reached, such as the issue of a planning permit or the registration of the subdivision.
Development agreements can be structured in a number of ways: a fixed payment per titled lot delivered, a share of gross revenue from lot sales, a minimum guaranteed return with an additional profit share above a defined threshold, or a hybrid of these approaches.
How it differs from a joint venture
A development agreement and a joint venture are often confused, but they work differently in important ways.
In a joint venture, the landowner and developer are formal partners in the project. Both parties share in the costs and the profits. The landowner’s return is tied directly to how the project performs – if the project does well, the return can be high. If costs exceed expectations or the market softens, the return may be lower.
In a development agreement, the landowner’s return is more defined. The structure is agreed upfront, and the landowner generally has more certainty about their return than in a full joint venture. Development agreements also tend to give the developer more operational control over the project.
When a development agreement may be the right fit
Development agreements tend to suit landowners who want more than a fixed sale price – but who also want more certainty and less complexity than a full joint venture. They are often a good fit when:
- The landowner wants to participate in the development upside but is not comfortable with the open-ended risk of a joint venture
- The landowner needs some certainty about the timing and amount of their return for financial or estate planning purposes
- The landowner wants to stay connected to the project without taking on the full complexity of a formal partnership
- A straight sale feels like it undervalues the land but a full joint venture is impractical
What to look for in a development agreement
If you are considering entering a development agreement, there are a few things worth understanding and negotiating carefully:
- How your return is calculated and when it is paid
- What happens if the project is delayed or the planning outcome is different from what was expected
- What rights you retain over the land during the development period
- What obligations the developer has in terms of managing the project and keeping you informed
As with any legally binding agreement, every landowner considering a development agreement should get independent legal advice from a solicitor with experience in property law before signing anything.
A structure worth understanding
Development agreements are not the right answer for every landowner or every site. But for those in the right circumstances, they can offer a genuinely attractive middle ground between the certainty of a sale and the participation of a joint venture.
If you would like to understand whether a development agreement might suit your situation, UrbanVale welcomes a confidential conversation. We will take the time to explain how the structure works in practice and whether it may be appropriate for your land.
Talk to UrbanVale about development agreements – urbanvale.com.au