COVID-19 – From Design to Development: Failures, Deadlines and Dilemmas? | Dentons

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introduction

We are on the cusp of a COVID-19 pandemic. In our previous articles on COVID-19, we focused on force majeure and the legal doctrine of frustration, particularly as it relates to how construction delays can affect a contractor’s obligations to the contractor under the construction contract. See:

Since then, COVID-19 has traveled far and wide. According to situation report No. 45 of the World Health Organization (WHO) based on data from March 5, 2020 (SR 45), COVID-19 has hit over 80 countries and crossed most of the continents. We reproduce Figure 1 from SR 45 on the WHO website:

Every day we read and hear reports of labor shortages, factories that are still closed, gradually opening and not operating at full capacity even when they are open. The outbreak has reportedly caused massive disruptions to global production, transportation and cross-border supply chains.

In Singapore, this is an acute problem for contractors as most of the materials, plant and equipment and manpower in the building and construction industries come from anywhere but Singapore – this includes portland cement, marble, tiles, particle board, appliances, screws and even epoxy resin! With the introduction of prefabricated prefabricated volumetric construction (PPVC) in many building development projects in Singapore, one can safely imagine the implications for the building process, even if just one element is missing.

It is therefore not surprising that some contractors are already claiming and / or doing Force majeure Allegations. As the number of such claims is expected to increase in the coming weeks, let’s focus on now the position of the developer – How do construction delays possibly affect the developer and in particular the deadlines that various other third parties may impose on the developer?

Deadlines imposed on developers

In the case of a building development project, the developer may have different deadlines that relate to construction milestones and / or depend on the timely completion of the project within the framework of the construction contract between the developer and the main contractor. Such deadlines are imposed by various third parties such as government agencies, individual end buyers and lenders.

Below we summarize some examples of such deadlines as well as some practical tips for the developer:

Type of deadline Consequences if the deadline is exceeded

Qualifying Certificate (QC) regime

Government agency – Homeownership Controller, Singapore Land Authority (Controller).

meeting – The QC normally requires the developer to complete the construction of the entire housing estate and obtain the Temporary Employment Permit (TOP) for the entire housing estate within 5 years from the QC date (QC deadline). The QC is usually secured by a bank guarantee or insurance guarantee in the amount of 10% of the property price (QC security).

The controller may lose QC security.

Practical tips

  1. When the QC deadline is approaching, it is advisable that the developer review this and immediately request the controller to extend the QC deadline.
  2. The extension fee to be paid is 8% of the property purchase price for the 1st year of extension; this is 16% for the 2nd year and 24% per year for the 3rd and the following years.
  3. Hopefully, given the events affecting the world and the local construction and construction industries from the COVID-19 outbreak, those responsible will grant a waiver or a reduction in the renewal fee.
  4. Alternatively, if the developer is a publicly traded developer with a significant connection to Singapore, the developer may consider applying for an exemption from the QC (according to the new reason for exemption introduced on February 6, 2020).

Government Land Sales (GLS) program

Government agency – The state and the government-appointed real estate seller (for example, the Urban Redevelopment Authority (URA)).

meeting – The tender conditions and the building contract (GLS sales conditions) for all GLS locations require that the builder builds and receives the TOP for the entire development within a certain project completion period (usually 60 months from the date of acceptance of the offer or longer), depending on according to a specific project) (PCP deadline).

This is usually a case of default in accordance with the GLS Conditions of Sale.

As a rule, the GLS Conditions of Sale do not contain any Force majeure Provisions designed to suspend or excuse the developer’s contractual obligations, including compliance with the PCP deadline.

Practical tips

  1. As the PCP deadline is approaching, it is advisable that the property developer investigate and immediately apply to the relevant state land sales agent for an extension of the PCP deadline.

  2. The extension premium to be paid is 8% of the advertised property price for the 1st year of extension; this is 16% for the 2nd year and 24% per year for the 3rd and the following years.

  3. Based on URA’s circular on the Renewal Rewards Program, the prevailing guideline is that for delays in work progress for reasons beyond the control of the developer (e.g. the project). It is certainly true that construction delays due to the COVID-19 outbreak are “reasons beyond the control of the developer” and it seems likely that these delays should be viewed as such for the purposes of URA’s Renewal Awards program.

Additional Buyer Stamp Tax (ABSD) waiver for housing companies

Government agency – Inland Revenue Authority of Singapore (IRAS).

Deadline – As part of their obligation to IRAS in exchange for ABSD pre-enactment, the developer is required to (i) begin property development on the property within 2 years from the date of purchase and (ii) complete the housing estate and sell all of the residential units contained therein within 5 years from the date of purchase.

The developer is obliged to pay IRAS an amount equal to the transferred ABSD plus interest of 5% pa, calculated from 14 days after the purchase date. It should be noted that the ABSD to be paid is not pro rata.

The applicable ABSD rates are available on the IRAS website.

Housing Developers Rules (HDR) regime – for licensed housing developers

Buyer – Individual end buyer of the unit.

Deadline – According to the prescribed forms of the purchase option and sales contract (HDR sales conditions), the developer must specify the latest date to hand over the vacant ownership of the unit (Vacant Possession Deadline).

The developer is obliged to pay the buyer a lump sum compensation (LDs), which is calculated daily at 10% pa on the total amount of all installments paid by the buyer on the purchase price.

The HDR terms of sale do not include any Force majeure Provisions designed to suspend or excuse the developer’s contractual obligations, including compliance with the free possessions deadline. Force majeure Provisions in the facility agreement, if any, usually work in favor of the lender.

Practical tips

  1. For Unsold Units – It would be advisable for the developer to change the deadline for vacant properties that should be included in every purchase option / purchase and purchase agreement to a later date. This is to minimize the risk of LDs in new sales.
  2. For Units Sold – LDs become due if the free possession deadline is not met, unless the developer is able to negotiate other options with the buyer.

Final thoughts

If the main contractor succeeds in meeting the completion date from the construction contract due to his extension claims (EOT) due to Force majeure, it means that the main contractor is likely to be released from its obligations to pay LDs for the excused period.

What then happens to the developer and their separate deadlines vis-à-vis the various third parties?

  • Will the developer be appropriately relieved with regard to the deadlines of the QC regime, the GLS program and the ABSD regime? Given the ongoing global impact of the COVID-19 outbreak, it is hoped that government agencies / state landlords will consider positively developers’ applications for EOT (as they have done in previous crises). It is encouraging to note that the government has signaled that it is closely monitoring both the construction industry and the real estate market, will adjust its policies as necessary to ensure a stable and sustainable real estate market, and stand ready to adopt a case-by-case approach for projects that need help (see the Business Times article of March 5, 2020 for more information).
  • Is the developer being relieved accordingly with regard to the deadlines for his loan financing? The lender may not immediately declare default in payment and demand repayment of the loan. However, in the case of a housing project, a slower pace of construction and / or a significant delay in the expected timing of obtaining TOP for development will result in the developer collecting down payments from individual end buyers more slowly (and possibly also a slower pace in unit sales in development). This ultimately leads to higher interest costs for the developer.
  • Is the developer appropriately relieved of the deadline set in the HDR regime (ie from paying LDs to the individual end buyer)? This does not appear to be the case as there is no force majeure provision in the HDR Terms of Sale. While the buyer is unlikely to rely on the legal doctrine of frustration to complete the unit purchase, the sizeable amount of LDs the developer has to pay for each unit of the project sold is already one for the developer quite a punishment. We hope that for most of the developers who have otherwise been able to get a good build pace, with adequate buffers built into the free property deadline in the option / sell and purchase agreement, and with continued efforts by Government Agencies and Communities To contain the spread of COVID-19, the effects of LDs can be avoided and / or minimized.

Hence, there seems to be a real asymmetry between the developer and the prime contractor, especially under the HDR regime. Perhaps it is time to rethink the mandatory form of contract for the developer and the individual end user (i.e. the HDR conditions of sale) and / or the risk of the developer towards the individual end user by changing the construction contract that the developer enters into with his main contractor .

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Dentons Rodyk thanks and thanks Senior Associate Weilin Chua for their contributions to this article.

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