The Issues Developers Should Consider Before Entering into a Section 173 Agreement for Greenfield Developments

Section 173 Agreements are a common feature of development projects affected by an Infrastructure Contributions Plan (ICP) or Development Contributions Plan (DCP), particularly given they are often imposed as part of the Urban Growth Zone (UGZ) Schedule, associated Precinct Structure Plan (PSP), planning permit condition or as an “in kind agreement”.

They are often presented as relatively routine implementation documents dealing with infrastructure contributions, land credits, reimbursement arrangements, public land vesting, works in kind and public open space contributions.

Our experience across growth area developments, ICPs, DCPs and Section 173 Agreements is that the most significant commercial issues are often hidden in seemingly routine drafting. Too many times do we see Council’s using their ‘template’ agreement and advising developers that the provisions are standard; we can however sit here and comfortably say that is not the case. It is important for each agreement to be tailored to the development and risks properly considered.

While many agreements use familiar precedent clauses, the way risk is allocated can vary significantly from project to project. The issues that commonly affect project outcomes include credits, reimbursement rights, valuation mechanisms, infrastructure approvals, vesting obligations, timing of delivery and future flexibility.

The following are some of the issues developers should consider when negotiating and documenting section 173 Agreements.

1. Does the Agreement Properly Deal With Credits?

Many developers understandably focus on whether they are entitled to a credit.

Equally important questions include:

• How is the credit calculated?
• Is the credit indexed?
• Can it be transferred?
• Can it be applied against future liabilities?
• What happens if the ICP is revised?
• When can the benefit of the credit actually be realised?
• Is there an opportunity for a cash payment for any credit balance during the life of the project or upon completion?

A substantial credit may have limited practical value if the mechanism for applying or recovering that credit is unclear.

An important issue which often comes up is understanding the pros and cons of when to negotiate for the entitlement to a credit arises? There are a variety of trigger points that we have seen, such as upon execution of the Section 173 Agreement, vesting of land or issue of a certificate of practice completion. These need to be properly worked through to avoid future complications and balanced against the indexation mechanisms.

For example, we have seen credits issued on the signing of a Section 173 Agreement prepared without the benefit of our strategic advice which has later become a serious detriment to the landowner.

It may also be possible for one to negotiate a cash payment for a land or construction project rather than receiving  credit.

2. What Does the Reimbursement Mechanism Actually Require?

Reimbursement provisions are often among the most commercially significant aspects of an agreement as it returns cashflow to the developer.

Issues that frequently arise include whether reimbursement occurs in cash or credits, who is responsible for payment, when reimbursement is triggered, whether reimbursement is subject to conditions, whether reimbursement is capped and whether the amount is indexed over time.

The existence of a reimbursement entitlement and the ability to recover that entitlement are not necessarily the same thing.

3. Are Values Being Fixed Too Early?

It is a common issue that Council’s seek as a matter of practice to fix land values, reimbursement amounts, credit values or infrastructure costs. We have consistently raised concern with the lawfulness given that there is no framework in the Planning Environment Act 1987, drafting of DCPs or ICPs , or otherwise, which enables Council to enliven this practice. See our article on “Are Councils Highway Robbers in the Application of Development Contribution Plans?”.

It therefore often falls to commercial considerations and negotiated outcomes to resolve this issue. In some instances, we have even issued proceedings to the Victorian Civil and Administrative Tribunal for intervention.

In most cases, fixed values inevitably allocate risk.

Changes in market conditions, construction costs, infrastructure scope and project timing can all significantly affect whether a fixed value ultimately works for or against a developer. Similarly, in our extensive experience, credit or reimbursement values are underfunded at the developer’s risk.

The important issue is often not whether a value can be fixed, but who carries the risk if circumstances change.

4. Have Future Project Changes Been Considered?

Very few developments proceed exactly as originally anticipated, particularly as authority approvals and development mechanisms are becoming more unpredictable and complex.

Projects evolve. Staging changes. Infrastructure delivery changes. Authorities give unpredictable requirements. Market conditions change.

Developers should consider whether the agreement provides sufficient flexibility to accommodate amended staging, revised development sequencing, changes to infrastructure delivery, future permit amendments and future ICP amendments.

It requires a high level of diligence to ensure the right flexibility and triggers are worked into a Section 173 Agreement.

5. How and When Will Public Land Vest?

The timing of vesting obligations can have significant consequences.

Issues worth considering include the timing of vesting, interaction with development staging, security requirements, delivery obligations linked to vesting and the relationship between vesting and reimbursement rights. The servicing requirements and ability for a partial-delivery may also become relevant.

These provisions often affect project cash flow and delivery sequencing.

6. Are Works in Kind Properly Documented?

Where developers are delivering infrastructure as a works-in-kind arrangement, it is important to understand how the infrastructure is identified, how credits are calculated, how cost variations are treated, how reimbursement occurs and what happens if the final delivery cost differs from original assumptions.

The detail of these provisions can have substantial financial implications.

7. What Condition Must Land Be In When It Is Vested?

Many agreements contain obligations regarding the condition of land when it is transferred or vested.

These requirements may address contamination, rubbish and fill, existing structures, remediation obligations, fencing, access arrangements and environmental conditions.

Developers often focus on the land area being transferred without giving the same attention to the condition standards attached to the transfer.

Those obligations can have significant cost implications and should be clearly understood at the outset. In some circumstances, it can result in significant delays if not considered at the outset.

For example, if not all services are expected or could be delivered as part of the staging for a land project, this should be accounted for in the Section 173 Agreement.

8. How Does the Infrastructure Approval Process Operate?

Many section 173 Agreements contain detailed procedures governing the approval, design and delivery of infrastructure.

These provisions often address design approval, engineering approval, construction standards, authority approvals, certification requirements, practical completion, defects liability periods and handover requirements.

Questions worth considering include:

• Who approves the design?

• What is the expected process for defect liability periods and handover period with the appropriate authority?

• To what extent should Council be entitled to oversee the construction project and delivery?

• How quickly must approvals be provided?

• What happens if comments are delayed?

• Can additional requirements be imposed during the approval process?

• When is infrastructure deemed complete?

• What must occur before credits or reimbursement become available?

What may initially appear to be an administrative process can have substantial consequences for project timing, costs and delivery. One should also have consideration to the role of Council versus the authority with ultimate responsibility, if they differ.

9. How To Account for Public Open Space Contributions and Under / Over Provisions?

While the requirement for a public open space contributions arises under the Subdivision Act 1988 and, where applicable, a planning scheme, Section 173 Agreements may operate as effective “deferral arrangements” to set out satisfaction of this obligation. There may be avenues, for example, to align expectations on the amount of contribution, staging and value. One must also consider whether open space being vested as part of the development project can appropriately go towards satisfaction of the obligation.

Again, in our experience, Council may some times use the mechanism of a Section 173 Agreement to define how the developer is to address the contribution which diverge from legal rights and obligations. For example, inappropriately fixing the value of the land to be vested.

Where included, a Section 173 Agreement should also account for overprovision of open space such as a cash reconciliation payment to the developer and timing of such payment.

10. How to End an Agreement

While focus is often put on the commencement of a Section 173 Agreement by seeking to rush its execution, the implementation of an effective ending provision is often an oversight.

In our experience, where land is being developed and sold to an end-user, how the agreement can end, in whole or part, can similarly become important. We seek for mechanisms which allow the ending of an agreement prior to transfer to the end-user where the substantive obligations are intended to rest with the developer.

Where this is not done properly, it risks creating issues at the other end for the end-users.

11. Flexibility

As a general comment, where a project is anticipated to take several years to complete, it is difficult to predict what will happen. We often see changes in legislation, authority approaches and other matters which could not be foreseen at the outset.

Consideration must be provided to what flexibility is necessary to be worked into a the Section 173 Agreement to account for changes, whether it be for staging, infrastructure delivery or other requirement.

Otherwise, Section 173 Agreement are inherently difficult to amend or may result in delays.

Experience Matters

In our experience, the recurring issues are rarely found in the headline provisions of an agreement. Done properly, there is no “template” Section 173 Agreement that can be used and one size does not fit all. These agreements, which have a significant impact on how a greenfield development progresses, need to be properly thought out and tailored to the project.

More often, they arise from the interaction between credit arrangements, reimbursement mechanisms, valuation provisions, project staging, infrastructure delivery obligations and future development assumptions.

The drafting may appear familiar. The commercial consequences often are not.

This is why utilising the experience of Best Hooper, as a leading developer-focused firm, can provide that real value from the outset and set expectations with Council to avoid suprises.

Key Takeaway

While section 173 Agreements are often viewed as implementation documents, they frequently contain the provisions that determine how credits, reimbursements, infrastructure obligations and project risks are allocated.

Understanding those issues early can assist developers to make informed commercial decisions and avoid unintended consequences later in the life of a project.

We appreciate that a developer may be rushed to commence a development, however that, in our experience, can be short-sited and give rise to a panolpy of issues during the course of the project. Experience matters.