Article / 15 May 2020

Deferring land payments: are there valid ways to do it?

Insight shared by:

Gateley Legal

With reservations and sales grinding to a halt due to COVID-19, so has cash flow. Naturally, housebuilders are looking at their obligations to pay land payments under existing contracts to see whether they can be deferred to such time as their cash situation improves. But are there ways of doing so, without being in breach of contract?

Unfortunately, most land contracts will not expressly cater for what is happening at the moment. In other words, they do not contain any express provisions (such as force majeure clauses) that allow for deferral of payments due to the financial fall-out from a pandemic or epidemic.

Some housebuilders have asked us whether the legal doctrine of frustration might apply to the situation. If it did, then parties could be discharged from their contract. However, frustration only applies when a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken under the contract. This does not cover the situation where a party finds it financially more difficult to perform the contract, or indeed where a party cannot afford to do so.

So, there is no obvious way in which housebuilders can validly defer payments under land contracts. However, a close look at the terms of the contract may reveal other ways of deferring.

Many land payments are linked to completion of the transaction, which in turn is conditional on certain conditions being satisfied. Some land payments are themselves conditional on certain conditions being satisfied. So, the first thing to do is check very carefully whether those conditions have actually been satisfied. Usually the condition will be defined by reference to a number of criteria that are set out in the contract. 

Criteria to look out for in a contract:

  1. If vacant possession is a condition, has it actually been given? Look at the definition of vacant possession and consider whether it has been fully achieved.
  2. If the grant of a satisfactory planning permission is a condition, what exactly does this mean and has it been achieved? Some definitions are very housebuilder-friendly, in that they are defined by reference to what a reasonable developer (of the same type as the housebuilder) would consider to be satisfactory. The definitions will contain a list of criteria (such as ‘buyer’s onerous conditions’) that could mean that the planning permission is not a satisfactory planning permission. The housebuilder should study these very carefully to see if they allow it to validly argue that the planning permission is not satisfactory.
  3. There may be other conditions, such as infrastructure works having reached a certain stage (such as practical completion). Again, look at precisely what is required and whether it has been achieved.

If the housebuilder can identify a good reason (or good reasons) why one or more conditions have not been satisfied, then this may lead to the payment being deferred until such time as they have been satisfied. The housebuilder should also remember that identifying such a reason may give it a ‘bargaining chip’ in any commercial negotiations it is having with the seller in relation to deferring payments.

In doing this, the housebuilder must be aware of the following:

  1. The contract will probably contain an obligation on the parties to co-operate with each other and act in good faith. Therefore, the reasons the housebuilder relies on to argue that a condition or conditions have not been satisfied must be good reasons. This means they have to be justifiable by reference to the definitions and criteria set out in the contract. If the housebuilder is unable to do this, it will be seen to be deliberately delaying, and will potentially be in breach of its co-operation/good faith obligations.
  2. The contract will probably contain an expert determination clause. This means that where the parties are in dispute as to whether a condition has been satisfied, the matter will probably be ultimately decided by the expert.
  3. Payments, particularly deferred payments, will probably be secured by a legal charge over the land. A failure to pay will probably entitle the seller to enforce the charge. That said, if there is a dispute as to whether the payment is actually due, a Receiver or Court would be very reluctant to enforce the charge, particularly if the dispute has been referred to a contractually agreed dispute resolution procedure. In addition, where the buyer is a non-PLC housebuilder the legal charge may be subject to a deed of priority because the housebuilder’s bankers will be protected as well. Whilst the legal charge may well rank ahead of the bank security, often the deed of priority will require notice to the bank, or a moratorium period, which means that whilst a payment might become due, the legal charge could nevertheless not be immediately enforceable by the seller.
  4. Be aware of any longstop dates. Many land contracts contain termination provisions providing that if the conditions are not satisfied by a certain date, one or both parties have the right to terminate. Whilst housebuilders may want to defer payments, they will probably not want to lose the contract, so they must be careful not to run past the longstop date.

In summary, whilst there is unlikely to be an ‘easy way out’ in terms of deferring payments under a land contract, a close examination of  the terms of the contract, and especially any conditions, may reveal ways in which payments can be deferred, even if only for a short time. It should also be remembered that identifying any such ways will also give the housebuilder leverage in any commercial negotiations it is having with the seller in respect of deferring payments.

Further support

If you are looking to defer land payments, go through your contract with a fine toothcomb, to see if there are any valid ways in which payments can be deferred. Contact our Housebuilder Team here at Gateley who would be delighted to assist with this.