I need some breathing space - standstill agreements

The current economic climate has caused many property developments to become commercially unviable mid-way through construction. In these circumstances, developers and funders could consider standstill agreements which will allow them to stop work until the market recovers and the development returns to a profit making project.

Even if funders had the money to meet the monthly requests for drawdown for the payment of construction costs, the anticipated value of the finished property may have fallen to such an extent that the project has become loss making with loan to value covenants being breached. This would leave the developer facing potential insolvency and the funder facing the prospect of stepping into a loss making project.
An attractive alternative option for the developer and the funder would be to ‘mothball’ or ‘stand the project still’ for whatever time it takes for the market to recover and the project to return to a profit making position.

However, you must take account that the building contract between the developer and the contractor will almost certainly lack provision for unilateral termination or substantial suspension of the works by the developer on the grounds the project is no longer commercially viable. Should the developer attempt to do this, the contractor would have a claim against the developer for wrongful termination with the measure of the contractor’s damages being his loss of profit on the remainder of the job. That is the contractor’s legal position.

The commercial reality is that most developers these days are an SPV (Special Purpose Vehicle) created for the particular project. The SPV is likely to lack its own assets so any claim by a contractor for unlawful termination may actually be rather pointless if the contractor has no prospect of getting his hands on any money. In such circumstances the contractor may be willing to accept a deal along the following lines:

A multi-party agreement, the ‘standstill agreement’, between the funder, the developer, the contractor and, if there is a pre-let in place, the tenant, standing the project still, until market conditions improve.

Such an agreement might include the following provisions:

• If the contractor is big enough and has other work and other cash flow that can keep him going during the standstill period, then he may be able to live with simply downing tools and resuming on another day. 
• If the contractor’s financial position means he really can’t wait for the work to resume on another day, then the developer and funder allow the contractor to sell the benefit of the building contract on to another contractor who is in a better position to wait out the standstill period. 
• The original contractor gets his hands on some ready cash in the form of whatever price he can obtain for selling the work on. The new contractor banks a certain job for the future, albeit the funder may have to produce some sort of guarantee to that effect. 
• The devil would be in the details and in the due diligence the new contractor would have to undertake before taking on the work of another contractor. 
• What about the tenant in all of this? In the current market he may well be only too happy to walk away from an impending lease and a level of rent that was negotiated before the market fell.

For those who find themselves in this predicament, a standstill agreement could offer some breathing space. However, if you are considering this route, you should seek professional legal advice.

Ian Reid
Construction & Engineering Partner