A joint development agreement (“JDA”), also commonly referred to as a collaboration agreement, development agreement or development rights transfer agreement, is a contract between a landowner and a developer to facilitate development and sale of a real estate project.
Under a JDA, the landowner contributes their land, while the developer contributes requisite skill and resources towards construction of the project, which may be commercial, residential or mixed-use in nature. JDAs have become more prevalent and widely accepted in recent times. Under a JDA, the landowner transfers the right to develop, construct, market and sell a project on their land (“Development Rights”) to the developer, whilst retaining the legal title of the project land.
Consideration Structure
In consideration for grant of Development Rights, the landowner becomes entitled to compensation, which is typically structured in one or a combination of the following ways:
- Area Sharing: The landowner and developer distribute the developed area in the project amongst each other. The landowner may choose to retain their share of the developed area or permit the developer to sell the same on their behalf.
- Revenue Sharing: The landowner is paid a percentage of the top-line revenue / receivables from the sale of developed area in the project.
- Profit Sharing: The landowner is paid a percentage of the bottom-line profit or surplus from the sale of developed area in the project after accounting for project-development costs, statutory costs, servicing of project finance, etc.
- Monetary compensation: The landowner is paid monetary compensation (in one or more time-linked or event-linked tranches) that may be commercially decided between the parties, taking into account the market value of the land and various other factors.
Licenses and Approvals
The Development Rights often include the right to procure necessary statutory licenses and approvals required to commence construction and sale of the project, in the developer’s name. Significantly, the developer is recognized as the ‘promoter’ for the purposes of registration of a project under the Real Estate (Regulation and Development) Act, 2016 (“RERA”) and assumes the responsibilities and liabilities which are imposed under RERA, including defect liability and delay penalty. It is common practice that along with the JDA, the landowner also executes and registers a power of attorney to authorize the developer to act on their behalf for the purposes of obtaining licenses and approvals for the Project. This is crucial since many applications and other documents required for obtaining key approvals may need to be signed or co-signed by the landowner, who is the legal owner of the project land.
Development Plan
Typically, at the time of execution of the JDA, the developer and landowner agree on a development plan or business plan which outlines the commercially agreed terms such as timelines for procuring good-for-construction approvals, project completion timelines and milestones, sales velocity, minimum sales price, estimated project costs, etc.
From the standpoint of a landowner, compliance with business plan is imperative as deviations in the minimum sales price or project costs could directly impact the landowner’s payout in a profit-share arrangement.
Deviations in the project completion timelines would impact the landowner’s payout, both in a revenue-share/profit-share arrangement as well as in an area-share arrangement. Generally, landowners are inclined to allow minor deviations in the business plan to account for adverse market conditions. The landowner’s control mechanism should be robust in case of profit-share arrangement, as compared to area-share or revenue share arrangements.
Usually control over branding, designing, planning, appointment of contractors, and other similar aspects related to the project development and marketing rests with the developer. However, the parties may mutually agree on certain standards and elements.
Project Accounts
The treatment of the bank accounts and collections from the project is governed in accordance with the provisions of RERA. Typically, the developer would prefer to retain sole control over the bank accounts of the Project. In revenue or profit-sharing arrangements, the landowner would generally seek to have visibility over the accounts as well as the right to conduct independent audits to ensure project collections are utilized according to the agreed waterfall priority.
Construction Funding
Developers often bear the project development costs from their own sources, project collections, or by availing construction funding from banks or other financial institutions. Construction funding typically requires adequate collateral such as mortgage over the project land and all entitlements of the developer pursuant to exercise of Development Rights.
Thus, while funding and mortgage rights are essential for a developer to have in the JDA, at the same time, it is important to ensure that construction funding is on a non-recourse basis to protect the landowner from any personal liability. Further, the landowner may seek to keep their entitlement in the project outside the ambit of the collateral provided to the lender. It is commonplace for a landowner to execute a power of attorney allowing the developer to act on their behalf for execution and creation of security.
Termination Rights
The landowner would typically prefer to negotiate termination rights in case of breach of laws by the developer or material deviations in the agreed business plan such as failure to meet construction timelines. Additionally, the landowner may also seek termination in case the developer becomes subject to insolvency proceedings.
However, termination of a JDA is quite complex after launch of the project and creation of third-party rights on the project land. Change of developer is governed by the provisions of RERA which, among other conditions and requirements, mandates prior consent of at least 2/3 of the total allottees of the project as well as the Real Estate Regulatory Authority of the concerned state.
It should also be noted that termination of a JDA may not always be possible. For instance, one of the conditions for grant of license by the Directorate of Town and Country Planning, Haryana (“DTCP”) in favour of a developer is that the JDA must be irrevocable. In such cases, the landowner may instead seek to incorporate a ‘construction step-in’ right to take over the development of the project from the developer and appoint a third-party construction company to carry out the construction work.
Registration
The Registration Act, 1908, mandates registration of any document or instrument which creates or assigns right, title or interest in any immovable property. Though, as discussed earlier, the legal title of the project land remains with the landowner, the developer acquires rights and interest in the project land through transfer of Development Rights.
Consequently, a JDA is mandatorily required to be registered in order to be valid and enforceable. Additionally, government authorities such as DTCP, in the State of Haryana, have mandated the requirement of a registered JDA prior to granting development license in favour of a developer. The stamp duty and registration charges payable on execution and registration of a JDA vary from state to state.
In conclusion, while a JDA is an effective tool for facilitating real estate development and offers mutual benefits for both landowners and developers, it is crucial that the JDA is carefully and meticulously drafted in a balanced manner to protect the interests of both parties. It is also important for the parties to assess the taxable instances and overall tax implications pursuant to a JDA. A JDA must also adequately address and provide for all the potential issues and challenges which may arise throughout the project lifecycle.
(The author is Principal Associate at Saraf and Partners; Views expressed are personal)
