Sponsoring real estate development in sub-Saharan Africa

A guide



A guide to the development of commercial real estate in jurisdictions throughout sub-Saharan Africa, excluding South Africa.

Part I covers a number of key legal topics, which set the context for real estate development, including title, permits and approvals, currency and exchange control, registration of leases, security, stamp duty, and enforcement and dispute resolution. Part II addresses some practical considerations around financing developments in sub-Saharan Africa. Part III explores some relevant topics in more detail, including issues around occupational leases and pre-letting, construction contracts, and dispute resolution and enforcement under project agreements.

The market for commercial real estate development in sub-Saharan Africa is thriving.

Urbanisation, a wealthier population and a rapidly growing middle class, re-location of businesses, and travel to Africa for both business and tourism purposes is driving demand
for new and modern office space, hotels and retail malls.

Development is not uniform across the continent, and development is moving at a noticeably faster pace in certain countries, but the opportunities exist throughout sub-Saharan Africa. Development in Africa is not without its difficulties, however, and there are hurdles to be overcome when sponsoring a commercial real estate development in Africa.

This guide provides a brief description of some of the key matters to be considered and undertaken when undertaking the development of commercial real estate in Africa. It should be noted that South Africa is somewhat of an anomaly in this context, as it has a sophisticated land registration and ownership system, and many of the considerations which apply in other sub-Saharan African jurisdictions do not apply to it (for example, stamping requirements). This guide therefore focuses on the other jurisdictions in sub-Saharan Africa where real estate development is increasingly evident.

This guide deals primarily with issues specific to real estate development, rather than generic issues relevant to any infrastructure project financing, however there are certain exceptions to this where the subject demands greater attention.

Part I: Key issues to consider

Forms of title

Types of interest in real property and transfers of title

There are typically three types of interest in real property (i.e. land) in sub-Saharan Africa – freehold, leasehold and common-hold (or civil law derivations of the same, depending on the particular jurisdiction). There are also variations between countries; under Tanzanian law, for example, all land is held on trust by the President of Tanzania for the people of Tanzania, with long term leasehold interests being granted by the Ministry of Lands (acting on behalf of the President) under a Certificate of Title to Right of Occupancy.

The most common interest in land is a long leasehold interest, derived ultimately from the State (as freeholder) although there may be a series of sub-/under- leases between the State and the ultimate developer lessee. There may also have been various transfers or assignments of the interests down the leasehold chain. It is important to ensure that, at each level for each transaction, the relevant sub-/under- lease, and each transfer/assignment, was permitted pursuant to the terms of the title document from which it derived, and that the relevant lessor/landlord and freeholder consents have been obtained, including those from the State if necessary.

Developers and their lenders should always carefully investigate where title is held pursuant to a sub-lease, rather than a headlease derived directly from a freehold estate. This is because a termination of the headlease would normally, save as noted below, result in the sub-lease becoming forfeited or otherwise ineffective. However, relief from forfeiture can be obtained by the sub-lessor or their lenders if a contractual arrangement is entered into between the head-lessor (the freeholder) and the sub-lessor or their lenders – this may form part of the consent to grant security over the lease which is required as part of the financing arrangements.

Term of title interest

If the nature of the title interest is not freehold, the term of the title interest must also be established. It is important to investigate the term of the leasehold interest sought by the developer in order to ensure this is sufficient to build and operate the development over a period of time so as to achieve the required equity returns and discharge any debt obligations.

Who can hold interests in land

Typically property development companies in sub-Saharan Africa must be locally incorporated in the relevant jurisdictions in order to obtain a title to land, but these local entities may be partly or wholly owned by foreign shareholders. In some jurisdictions, there are additional restrictions to how land can owned: a local partner/shareholder may be required, or foreign owned companies may be restricted from holding freehold or long leasehold interests. In Ghana for example a non-citizen or a corporate vehicle may only hold leasehold interests with a maximum term of 50 years.

Deducing title

Deducing good title across sub-Saharan Africa can be a complex process, often with little in the way of a registered land system (and even where one exists one must often still look to the validity of registered leasehold interests to ensure good title). Where there is a land registration system, it may still present inaccuracies, since it is common in some jurisdictions (such as Angola) that registries are not always updated (or there are delays to record updates). The lack of computerised land registry systems through which title to land can be conclusively deduced means the process of obtaining and evidencing good title can be time consuming: it may be that each sub-lease granted or transferred needs to be assessed to definitely confirm the ‘route to title’.

Permits and approvals

Required permits and approvals

Aside from approvals or consents which may be necessary in connection with obtaining or transferring good title, as mentioned above, various development permits will be required for the purpose of constructing and operating commercial real estate.

For the purposes of the initial development, the key permits
are typically a building/planning permit or approval and an environmental permit. Other permits for operation such as occupancy/habitation permits, fire permits or health and safety permits are required once the construction phase is complete.

Grant of permits

Each permit is usually obtained from a separate governmental ministry or department, which can be a time consuming and onerous process. There is often a lack of coordination between the various ministries and departments in terms of obtaining permits, so for example the building permit and environmental permit may be controlled by different ministries, operating to different timetables and with different concerns and considerations. The process of obtaining all permits can cause delays, and should be factored into any development timetable.


The permits will typically contain various conditions which must be complied with as part of the development, some standard and some bespoke by reference to the nature of the development and the plans submitted in accordance with the application for the permit. For example in Lagos State in Nigeria there is no specific duration for a planning permit, but the permit becomes invalid if development has not commenced within two (2) years of the grant of such permit. Other countries impose limitations on the validity of the permit by reference to the building phase, so delays in construction may necessitate an application for an extension of the permit. It is important to consider these timing aspects when planning overall timetable.

Securing permits

Lenders will be keen to ensure that permits are either capable of being (and are) secured as part of the asset security, or are attached to the property such that they transfer automatically with the property pursuant to an enforcement by way of sale of the property itself; this is important to ensure that the security over the property is enforceable from a practical perspective.

Approvals are also likely to be required in connection with financing arrangements, particularly for mortgages over land, and these are discussed further below.

Currency and exchange control

There are no real estate specific currency control measures in force, however currency control in general is having an impact on real estate developments across parts of sub-Saharan Africa. The two most recent legislative changes concern Zambia and Ghana.

Changes in Zambia

In 2012 the Republic of Zambia issued new regulations in the form of SI No. 33 providing that no person may quote, pay or demand to be paid, or receive, any foreign currency as legal tender for goods, services or any other domestic transactions. The term ‘domestic transaction’ was defined in SI 33 as ‘any transaction within the Republic of Zambia that involves a payment of a sum of money in or towards satisfaction of a debt due, or for the credit of, a person resident in the Republic’. This had such wide ranging implications (including as to cover foreign currency loans and advances by local and international banks to local real estate developers) that clarity was issued firstly in the form of official clarifications and guidance and subsequently by way of amending legislation in the form of SI No. 78. SI 78 clarified, amongst other things, that ‘domestic transactions’ only refers to ‘the buying or selling, offering to buy or sell goods or services between persons within the Republic’ – such that lending arrangements from foreign financial institutions would not be covered – and further clarified that domestic transactions does not include foreign currency loans and advances by commercial banks registered in Zambia. The legislation would however still have covered rental/tenancy agreements between a local landlord and tenant, however in March 2014 the Zambian government revoked these currency regulations after determining that the regulations had resulted in a negative impact on the strength of the Kwacha.

Uncertainty in Ghana

More recently in 2014 the Bank of Ghana issued new regulations providing that all transactions in Ghana are required to be conducted in Ghanaian cedis, being the sole legal tender of Ghana. The regulations extended to financing arrangements (both new and existing, with the legislation having an element of retroactivity in relation to any existing arrangements), but further guidance clarified that the regulations were limited to those financing arrangements provided by local banks. Following months of uncertainty, a negative impact on the exchange rate, and a number of guidance notes and amendments issued by the Bank of Ghana, by the end of 2014 the effect of the new regulations on both domestic and foreign lending in Ghana was limited. An important element of the regulations which remains is that the cedi is the sole legal tender in Ghana, and there pricing of goods and services (including rentals) should be in cedis unless authorised by the Bank of Ghana.

Both the Zambian and Ghanaian legislation was introduced in order to support, stabilise and prevent a decline in value of the local currency and control the relevant country’s balance of payments. These underlying currency value concerns are not isolated to Ghana and Zambia, so the issue remains a live one for developers and financiers in the region.

Registration of leases

Even where a registered land system does not exist, there is typically a requirement for leasehold (or other equivalent) interests in land to be registered with the relevant land registry. Assignments or transfers of any such interests may also have to be registered. Registration may also be required in relation to occupational leases i.e. those granted by the landlord of an office block or shopping mall to its commercial tenants.

Registration involves the payment of registration fees, which can be material and typically are tied to the underlying rental payments for the period of the tenancy. In some cases registration fees are nominal, however leases may have to be stamped before they are registered, and stamp duty may involve substantial payments based on the value of the lease. In either case, this can place a financial burden on development companies (particularly if the cost must be borne at the outset of the development in order to have an enforceable anchor tenant lease in place as a condition precedent to debt funding). However, the effect of registration is often to ensure that the lease is enforceable against a third party, and is therefore really for the benefit of the tenant; a landlord may usually enforce its rights to receive rental payments from a tenant under an occupational lease without registration of the lease pursuant to the underlying laws of contract. In certain jurisdictions (such as Kenya) there is debate as to this position, but where this can be established as a matter of law this can persuade lenders (and developers themselves) against requiring these registrations and the associated fees. An in-depth understanding of the issues in the context of each transaction is critical.

See below for more details on stamping.


Two critical components of a lender’s security package on a commercial real estate financing in sub-Saharan Africa are security over shares in the development company (and typically its holding company, if any), and security over the land/property itself.

Share security

There are typically no restrictions or third party consents required in relation to taking or enforcing security over shares in the development company. If foreign sponsors have partnered with a local company in connection with the development, then waivers of pre-emption rights will typically be sought by lenders in connection with any enforcement, but this is an issue that can be resolved quickly and expeditiously without third party involvement, as both the onshore and offshore sponsors will most likely be involved in the financing and required to give security over their shareholding.

Security over the real property

Taking and enforcing security over real property itself is more complicated. It is possible as a matter of law to take and enforce such security, but various consents and approvals are typically required. The lease itself (assuming the interest in land is leasehold) may include a provision (passed down through the relevant sub-/under-leases) that encumbrances over the land in favour of financiers, and transfers pursuant to enforcement of such security, are permitted as an exception to the usual transfer restrictions, where landlord consent would otherwise usually be required.

This exclusion is typically not found where the ultimate freeholder is the State. Given that leasehold interests derived ultimately from the State are the most common form of land interest, there is usually a requirement to obtain consent from the State or relevant ministry or department for land; this can impact on timing and potentially costs (for example Lagos State governor consent requires a fee equating to 1% of the secured liabilities). The consent to granting security can also be used to obtain other comfort or confirmations the lenders may require, for example relief from forfeiture which was discussed above.

Stamp duty, security registrations and other filings

In addition to the registration of leasehold interests, it is typical that security documentation (and sometimes lease documentation) must also be stamped. Security documents usually also require registration at one or more registries and various costs and formalities may need to be factored into the timetable and funding requirements in this respect.

Stamping costs can vary, but on a project finance style real estate financing, with a full suite of security, there is invariably an ad valorem rate of stamp duty payable, tied to the amount of the secured liability. In jurisdictions where each finance document must be stamped, there may be merit in presenting all documentation together for stamping, and drafting to include as many classes of security as possible within the same security document, as this may have the effect that the ad valorem rate of duty is payable on one document only, with all other documents attracting a nominal (or at least a lesser) duty, although this is not always a solution. Up stamping mechanics should also be considered to mitigate stamping costs (at least on an up-front basis) although up stamping is not effective in certain jurisdictions (such as Ghana) where the registration regime requires that security can only be registered (and therefore effective) for the value for which it has been stamped. In cases such as this alternative commercial arrangements are sometimes agreed between the sponsor and the lenders regarding the stamping of security.

Where ad valorem stamp duty is payable, registration costs are usually nominal (although this is not always the case, such as in Nigeria). Depending on the nature of the document involved, registrations may be required at a number of registries, such as registration at companies registries as well as land registries. For example, in Ghana security over real property must be registered at the Lands Commission, the Companies Registry and the Collateral Registry.

Timing is also an important consideration when dealing with stamping and registration requirements. Typically stamping must be completed prior to registration, and registration must be completed (or at least applications for registration lodged) within strict time periods. Delays in stamping may mean that registration periods are exceeded, necessitating a court application to request an extended period to lodge the application to register. Registration can also be a lengthy process, in some cases taking several months, such as registration of land security in Ghana, and a clear understanding of the legal risks and practice is vital to ensure viability of funding.

Enforcement regime and dispute resolution procedure

The enforcement regime in a jurisdiction is an important consideration for any developer or lender, and ensuring compatibility between this and the dispute resolution procedures within the development and finance documentation is critical.

The developer’s primary concern will be in relation to the development/project documents, and the lenders will be concerned with both the project documents and the finance documents.

In an English law financing, lenders will consider the reciprocity of enforcement of English court judgments in the local jurisdiction(s) – there may be multiple relevant jurisdictions such as the location of the development, the ‘location’ of key contractual arrangements, and the jurisdiction of incorporation of shareholders granting security over their shares in the development company.

In the absence of (or indeed in addition to) reciprocity of English court judgments, lenders will consider the potential application of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) as international arbitration could afford the lenders with a suitable alternative to a court process.

If there is neither official reciprocity of enforcement of judgments, nor an availability of New York Convention enforced arbitration (due to the relevant host countries not being a signatory), it will be necessary to investigate the historic recognition of English court judgments. Angola falls into this category, where there is no official recognition of English court judgments, but where they are typically recognised and enforced by the Angolan courts without re-trial or examination of the merits.

We have set out below some more in-depth considerations in relation to dispute resolution mechanisms for development documents, although some of these apply equally to finance documents.

Part II: Practical considerations for financing

The key to financing a real estate development in Africa, as with any project finance transaction, is to plan ahead, focusing both on the structural issues, and the likely logistical difficulties, which may arise and impact both the terms of the financing and the timing to achieve financial close.

Structurally, it is important to understand the legal and regulatory framework of the relevant jurisdiction, and the corporate structure of the developer/sponsor, as part of the due diligence process:

  • Work towards identifying keys issues and risks upfront, so these can be dealt with appropriately in the transaction structure.
  • Lenders should work with their advisers to assess what risks they can take, especially relating to issues such as perfection of security and allowing early drawdowns as part of a phased closing where developers require funding on a tight timeline.
  • Find practical solutions, looking to what has been done before

Possible key points to consider are:

  • Corporate and tax requirements.
  • Ministerial approvals required.
  • Zoning requirements required.
  • Permits and licences required.
  • Exchange control – what is and isn’t possible for the structure, and how is it applied in practice.
  • Restrictions and issues with onshore and offshore bank accounts.
  • Any corporate restrictions on granting security or guarantees, under legislation or the developers constitution.
  • Whether it is possible to grant security over each asset class and associated costs.
  • Consents and approvals required to grant and enforce security.
  • Stamp duty and registration requirements.

Logistically, the key is to have a realistic expectation of the time required for each aspect of the deal, including the negotiation of the project documents and financing documents, obtaining relevant corporate approvals, obtaining government and counterparty consents, and stamping and registering leases and finance documents:

  • Work backwards from the funding deadline, so both developers and lenders (and their advisers) are aware of the hard deadlines.
  • Identify early on who is responsible for which tasks, and what support or guidance they may need from advisers.
  • Always expect the unexpected, and build in a timing buffer.

Part III: Key considerations for real estate developments

Issues in occupational leases and pre-letting – things to consider

From both the perspective of the developer and the lenders, it is preferable for the developer to enter into binding contracts with potential tenants prior to construction of a new development (or refurbishment of existing space) to guarantee a rental stream from the proposed capital investment. Often, depending on the size and nature of the development opportunity, bank finance may not be available without pre-let agreements in place for the key tenant or tenants. Many tenants also wish to have a say in the design and delivery of their new premises. This section highlights some points which developers and lenders should consider in the context of pre-let arrangements (often known as ‘agreements for lease’ rather than leases).

Building specification

The parties should agree the building specification in sufficient detail to reduce the scope for disputes. A developer will normally work up a draft specification and offer tenants the opportunity to input their requirements. Any changes made by a tenant should be verified by a consultant/engineer to ensure that they are appropriate and capable for delivery on time and on budget. There is often a mismatch between what a tenant wants and what it is prepared to pay for.

Building obligations and timetable

The developer will typically undertake to carry out and complete the development in accordance with an agreed set of plans and specifications, as well as to obtain all necessary consents and approvals for the development. There may also be penalties for delayed completion. The developer should consider which of these risks can appropriately be passed down to the builder, and critically, should limit (or exclude) the tenant’s rights to terminate the pre-let agreement should there be any delay in completing the development or obtaining the required consents.

Practical completion

The definition and consequences of reaching practical completion should be understood by all parties to prevent disputes. Practical completion occurs when the development works are complete, and usually triggers the requirement for the tenant to enter into a lease, and for rent to become payable (or an agreed rent free period to start). Certification of practical completion is normally issued by an independent architect/surveyor, and minor items called ‘snags’ are finalised or remedied after this has occurred.


The pre-let agreement should include a provision for joint measurement of the premises to finally fix the tenant’s payment. If this is by way of periodic rent, a price per square foot or per square metre will have been agreed and the final rent determined following the measurement. It is common for an independent measuring surveyor to be appointed by the parties for this purpose.


It is not uncommon to hand over space to a tenant in phases to allow commencement of its bespoke fitting out works. This can create conflict with the building contractor, as both parties may be on site at the same time. It is important to secure contractual rights against a tenant who interferes with progress and potentially delays delivery of other parts of the building. Equally, the building contract may need to recognise early handover to a tenant and the interface with the tenant’s own fit out contractor. During the carrying out of any works by the tenant, the developer may require insurance against damage caused by the tenant’s contractor.

Security for lease payments

Lenders and developers may want to consider whether the tenant should be required to provide a guarantee or some other form of security for its lease payments. This assessment will likely depend on the identity of the tenant, its reputation and its financial standing. Financials may be requested in order to make this assessment. Requirements for security should be agreed at the pre-let phase.

Tenant’s rights

Once the development has been completed, there may be issues or discrepancies between the specifications agreed with the tenant and the completed building. Minor variations between the agreed scope and what has been delivered are usually addressed through a price adjustment. Major issues could be mitigated by giving the tenant a direct contractual right against the building contractor. However, there will be circumstances where a tenant has the right to terminate and walk away – developers and lenders will want to limit these circumstances as much as possible.


The ability of the tenants to assign/sublet should be tightly controlled by the developer, and lenders will often expect a right to consent to any such assignments or subletting. Restrictions will vary depending on the market but tests should include the identity of the new tenant, its covenant strength, and its proposed use of the premises. The developer may also need to control the tenant mix, for example, in a shopping centre, or stop the tenant from competing with other existing tenants.

Lenders will require the developer’s interests in the pre-let (and the lease) agreement (and any security for lease payments given by the tenants) to be assigned to the lenders as part of the financing security package. This should be taken into account at the pre-let stage to ensure there is no restriction on the developer securing its interests in favour of the lenders.

Direct agreements

Lenders will typically require that direct agreements be entered into between themselves the anchor tenants. Direct agreements will afford the lenders certain rights, including to step in to the lease agreement if the developer is defaulting under its obligations to the anchor tenant or becomes insolvent, to avoid the termination of the lease agreement. The lenders requirements in this respect can vary, and often depend on the identity of the anchor tenant and the terms of the financing as a whole. The anchor tenants should be made aware upfront at the pre-let stage that a direct agreement between them and the lenders may be required.

Issues in construction contracts – things to consider

A failure by developers to carefully consider the terms on which they contract for construction delivery can often mean the difference between successful project delivery, both on time and on budget, and an expensive project failure.

Set out below are some of the key issues that should be at the forefront of developers’ minds when formulating a construction contract delivery structure, and many are issues which lenders should also consider when carrying out their due diligence of the project structure.

Form of contract

It is essential for developers to drive the process of ‘contract form’ selection in order to achieve a preferred pricing structure and risk allocation position.

It is often the case however that this is either left to the contractor or forms are selected simply on the basis that they were used on a previous transaction, without any regard to the particular circumstances of the current project. Use of the wrong form can, at best, place the developer on the ‘back foot’ in terms of eventually being able to achieve an acceptable risk allocation and pricing structure position or, at worse, can expose the developer to inappropriate and unnecessary time and cost overrun risk, which can ultimately impact on the developer’s ability to successfully deliver the project.

An understanding of:

  • all popular international standard forms of contract;
  • what they offer, in terms of pricing options and risk allocation; and
  • the amendments required to achieve an appropriate risk allocation position for developers

is essential if the developer is to make a proper informed decision as to the starting point in the contract negotiation process.

Single contract v multi contract

Where a single point of responsibility for all aspects of design and construction is not being assumed by one contractor, the developer must consider how procurement of the individual packages of works will be structured.

There typically needs to be some kind of central coordination from the developer or its engineer/construction management contractor. The developer will need to consider how the works packages will be split and how the interfaces (design and construction) created under a multi-contract structure are to be managed. Interfaces between contractors can provide a fertile area for claims against the developer if not properly managed.

Where interface risk is being retained by the developer, it will be necessary for it to take a proactive role in both design review and the management of construction activities on site. This role must be reflected in each contract through the inclusion of appropriate rights for the developer to approve design, and clear obligations for project wide coordination and cooperation between the individual contractors.

A more innovative way to manage this risk would be to require each contractor to enter into a form of interface agreement under which the contractors themselves take responsibility (including risk) for the management of design and construction interfaces. This approach has been successfully adopted on projects previously where there is a high degree of interface risk.


Defects in the completed works and the management of their rectification (including liability for the consequential losses arising from their presence in the works) is a key issue for any developer to consider. Defective works can impact on the value of the building, the purposes for which it may be used and of course the long term cost of maintenance.

It is important that the contract clearly prescribes that the contractor has responsibility for the rectification of defects following handover of the works, and contains appropriate contract liability provisions to properly motivate the contractor to rectify any defects. The contract should contain a robust testing and handover regime.

Limits on liability

A key consideration for a developer will be the extent to which it will have recourse against the contractor where there has been a default by the contractor. There is, as may be expected, a tension between the developer’s requirement for full recourse to the contractor and its security package, and the legitimate requirement of a contractor to limit its exposure to liability.

There are certainly market positions to be considered depending on the nature of the development but this is not an area where a standard approach can be applied to all developments since the nature and extent of the developer’s exposure will differ significantly from one project to the next.

It may not be appropriate for all the potential liabilities of the contractor to be subject to the liability cap. The scope of any exclusions from the agreed limit on liability should be a matter of commercial negotiation on a case-by-case basis.

Contractor’s security package

As mentioned above, if the contractor fails to deliver the works, the developer should have direct recourse to the contractor to recover its losses.

It may not be satisfactory for the developer (or its lenders) to rely on contractual damages claims alone, as to do so will expose the developer to cash flow and contractor insolvency risk.

To mitigate against these risks, developers typically require the contractor to provide additional security from financially robust third parties, a proportion of which should be ‘liquid’ in nature (as good as cash) to provide the developer with quick access to funds to meet immediate liabilities of the contractor shortly after they arise.

Developers should take care to ensure that the relevant security documentation is properly drafted to reflect the intended nature of the security required – litigation often involves a dispute around the intended nature of the security documentation and in particular the circumstances in which beneficiaries can rely on the relevant security. Unfortunately, poorly drafted documents often undermine the rights which beneficiaries think they have and accordingly the utility of the security. The importance of getting this right cannot be understated, both for the developer and for its lenders, who will require security over the developer’s rights here as part of their security package.

Direct agreements with contractors

Where the developer is not contracting directly with subcontractors and suppliers but is relying on a lead contractor to do so, it may be appropriate for the developer
to secure direct agreements with the key materials suppliers and subcontractors. Direct agreements will provide the developer with an opportunity to step into the relevant contract where the developer’s lead contractor is defaulting or becomes insolvent. Importantly, it will create a contractual link between the developer and each relevant subcontractor, and it will enable the developer to keep the supply chain in place during any period in which the lead contractor is being replaced.

Similarly, the lenders often require direct agreements with contractors and suppliers who they consider to be material to the delivery of the project. These agreements set-up a direct contractual relationship between the lenders and the contractor/supplier, and give the lenders the right to step into the contract when the developer or lead contractor is in default or insolvent, to mitigate the risk of the construction being suspended before the project’s completion.

Whilst these documents are often resisted by contractors, it is important that they are explained properly when presented so that the relevant subcontractors can fully understand the purpose of the documents and the advantages that they can offer. The risk of lead contractor or developer default and insolvency is of course one that is shared with the subcontractors. The direct agreement should therefore be seen as a means by which subcontractors can secure step-in by the developer or lender (as the case may be) and payment of amounts owed to them, in return for the subcontractor agreeing not to terminate its involvement in the project.

Design risk

The developer may wish to produce the design of the development itself (typically through its consultants) and may accordingly retain the risk in the design being correct. This approach is however likely to provide less price certainty for the developer, since there is likely to be an increased exposure for the developer to claims from contractors for additional time and money resulting from errors in the design. Our experience is that this is another fertile area for claims. It will be important for the developer to understand how the cost of any redesign or additional work will be met, since it is unlikely that full risk in this regard may be transferred to the developer’s consultants.

Developers may instead prefer that the party delivering the works will be responsible for all aspects of the works, including design. Often, early design responsibilities will be transferred to the contractor prior to the commencement of the works under a design and building contracting arrangement. This approach does however mean that the design will have to be carefully audited by the developer.

It will be important in all circumstances for the developer to understand where the design responsibilities rest and how they are to be managed. This will include indirect design risk that may materialise, for instance, from the developer assuming the risk of the sub-surface site conditions, which will have to be managed through site surveys.


The contract will usually state the price for which the works are to be completed. This will invariably be subject to modification as the works proceed, for example on account of ordered variations, allowable price fluctuations, the re-valuation of prime cost or provisional sum.

Where the original price payable for the works remains fixed, the contract may be called a ‘lump sum’ contract (e.g. FIDIC Silver Book). A lump sum contract would be appropriate where the contractor is assuming risk in all aspects of the design and works. The upside for the developer is that it gets price certainty, however it will not get the benefit of any underspend.

Given the contractor’s exposure to cost overrun risk under a lump sum contract, it would be usual for it to include risk contingency in its price. Care should be taken to ensure that the scope for further price increases is limited. It would not be appropriate for the developer to accept risk contingency pricing on one hand but on the other be exposed to price escalation in respect of risks that should really be managed within the lump sum price offered by the contractor.

Where the original price is based on quantity estimates which are to be re-calculated when the works are complete, the contract may be called a re-measurement contract (e.g. FIDIC Red Book). There will be less price certainty for the developer under this structure but overall capital cost advantages can be achieved where the risks being retained by the developer are manageable. Under this pricing structure it will be essential for the developer to achieve a fair degree of certainty around the quantities on which the original price is based – if these are materially incorrect, the effect on eventual cost could be dramatic. This is certainly an area in which we see lenders’ technical advisers spending a great deal of time during their due diligence process.

There are of course other pricing structures that can be considered by developers (for example, target cost). In all cases, it will be essential for the developer to understand the degree of cost overrun exposure it is assuming.


Developers should carefully consider their minimum requirements for the circumstances where they have the right to terminate the contractor and access the security package to meet the relevant costs and liabilities (including the costs of re-procurement of a replacement contractor).

In addition to standard ‘breach-type’ termination triggers, it would be usual for developers to include other termination triggers such as a right to terminate the contractor where key performance requirements are not being achieved and on the occurrence of extraneous circumstances not directly relating to the project or performance of the works which will affect the contractor’s ability to perform and meet its liabilities under the contract.

Termination triggers of the type noted above tend not to be adequately covered by many of the commonly employed international standard forms of contract.

Late completion

To the extent that the works (or any relevant part of the works) are completed on a date later than that fixed under the terms of the contract, for reasons for which the contractor is responsible (or are within its agreed scope of liability), the contract should include provision for the payment of delay liquidated and ascertained damages (Delay LADs).

These Delay LADs will usually be paid at a pre-ascertained daily or weekly rate to cover anticipated developer costs and losses (including any debt service costs) arising during the period of delay.

Liability sub-caps may be agreed and these sub-caps will be a key area for discussion between the developer and the contractor, together with the overall liability cap.

It is critical for the developer to ensure that Delay LADs under the construction contract will more than compensate the developer for any equivalent delay damages it must pay to its pre-let tenants as a result of delayed lease commencement.

Prior to conclusion of the contracting structure for any development, the developer should appraise in detail and understand the nature and extent of any actual or potential risk being retained by it under the contract delivery structure.

Where relevant, a strategy should be formulated to manage the relevant circumstances should they materialise. A ‘let’s wait and see’ approach is unlikely to be satisfactory to the developer or its lenders, since it is likely that prompt and pre-formulated action will be required if the developer’s financial exposure is to be mitigated to fullest extent possible.

Dispute resolution and enforcement under project agreements – things to consider

The right choice of dispute resolution provisions for project agreements can have a dramatic effect on the relationship between project participants and even the ultimate financial viability of a project. Fundamentally a dispute resolution mechanism must deliver clear enforceable decisions to allow deadlocked parties to move on, and to provide compensation to parties whose rights have been infringed. However, there are other important considerations to be taken into account in designing the most appropriate dispute resolution mechanism – some of these are considered below.

Fast track/interim relief

Disputes arise frequently under complex projects, but often it is not desirable or practicable to embark on a lengthy court or arbitration procedure to achieve a resolution. Whilst a commercial bargain may provide an alternative and quicker resolution it is not always appropriate, particularly if one party, such as a state entity, has a disproportionately strong commercial bargaining position.

Fast track or interim dispute resolution, such as adjudication or expert determination, can achieve the right balance between speed, neutrality of decision making and formality. A well drafted fast track or interim dispute resolution provision will provide for a clear and streamlined process with a clear start and end. Whilst such procedures need not be complex, care must be taken to provide clarity and avoid ambiguity in light of the multitude of ways in which a dispute may unfold. A poorly drafted fast track or interim dispute resolution mechanism is a recipe for protracted and expensive wrangling and fertile ground for a reluctant respondent to introduce delay and uncertainty.

Final determination – Court or Arbitration?

National courts can present an attractive choice for final dispute resolution. They may offer a large well respected judiciary, the certainty of a system of legal precedent and a wide range of sources of relief including interim preservative measures. However there is wide variation in the quality and perceived independence of the courts of different states, particularly where state parties are involved in a project. In addition, in the context of a project involving parties from multiple jurisdictions, the ability to enforce a court judgement from one jurisdiction against assets in another jurisdiction often imposes practical limitations on the use of national courts for dispute resolution in such projects.

As such, the English courts may be adopted as the preferred forum for dispute, due to the respected and sophisticated judiciary and certainty of legal precedent. It will be important to ensure that an English court judgment will be capable of being enforced against the relevant counterparty and its assets, and in this case the jurisdiction of the project, incorporation of the counterparty and global location of its assets will be of critical importance.

The attitude of national courts to enforcement of foreign court awards against the state or state entities is of particular concern where state parties are involved in a project. Practices vary, but often there is a perception that national courts will be more reluctant to permit enforcement against the state than against a commercial party. Again, an appreciation of these variations at the outset may allow risks to be avoided or at least mitigated.

By way of alternative to the English courts, international arbitration has developed as an alternative default forum for final dispute resolution. It offers the ability to locate the forum for resolution in a neutral jurisdiction but also, crucially, offers the ability to enforce across a wide range of jurisdictions via the New York Convention.

However, in specifying arbitration as the forum for final dispute resolution, there are advantages to be gained and pitfalls to be avoided in the drafting of an effective arbitration agreement.

Arbitration considerations

Institutional and ad-hoc arbitration

Ad-hoc arbitration can provide advantages in terms of reduced costs and greater flexibility of procedure. However, in the context of a high value complex project structure, parties are often persuaded to opt for arbitration administered by a recognised international arbitral institution.

Institutional arbitration can provide an element of security by offering a set of tried and tested rules and procedures as well as access to a wide selection of highly regarded arbitrators. Though these features may be imported into an ad-hoc procedure by appropriate drafting, they come ‘pre-packaged’ where institutional arbitration is specified.

Where institutional arbitration scores most highly is its ability to facilitate administration (and potentially consolidation) of multiple related arbitrations (potentially important in a complex project structure) and to avoid undue delay in getting an arbitration up and running by maintaining the pace of the early procedural steps in the face of delaying tactics by a reluctant respondent.

However, not all arbitral institutions are created equal. Some, for example, are better suited to multi-party, multi-contract disputes, as may arise in the context of a complex project. It is not uncommon for a state party to push for the use of its domestic arbitration institution, as various jurisdictions seek to establish themselves as the regional hub for international arbitration. However, there may be question marks over the neutrality and depth of expertise of such fledgling institutions that is important to understand. An appreciation of the real world track record of such institutions and what is ‘market’ for the type of project in question will help parties to understand whether to push back on such approaches.

Choice of seat

The seat of the arbitration is a critical to determining the procedural law of the arbitration and the nationality of the resulting award.

The procedural law can greatly influence the speed, cost
and perceived fairness of the arbitral process. For example, dictating the degree to which parties are obliged to disclose potentially adverse evidence. The nationality of the arbitral award is of fundamental importance to enforcement. In broad terms, an arbitral award is most likely to be enforced where it has been made by a tribunal seated a jurisdiction that is a signatory to the New York Convention and enforcement is sought in a jurisdiction that is also a signatory.

Neutrality of seat is often perceived as desirable, but neutrality alone is only part of the picture. Choice of the appropriate seat is a key decision in the drafting of an arbitration agreement.

Limits of arbitration

Despite its widespread application, there are limits to the issues that can be determined in arbitration. Different jurisdictions have drawn the boundaries of what is acceptable in different ways. It is not uncommon for certain issues concerning a state’s right to impose taxes and concerning rights in real property to be reserved to the national courts of the jurisdiction in question. These are of obvious importance to a real estate development project. However, there are subtleties to understand in terms of, for example, which rights in real property may be determined by arbitration and which are reserved to the national courts. A proper understanding of these issues will be essential to the preparation of an effective dispute resolution mechanism.


Enforcement of an arbitral award typically requires the award to be recognised in and then enforced via the courts of the jurisdiction in which the target asset or entity is based.

As noted above, the New York Convention is likely to be the central plank of any enforcement action in international arbitration. However it is important to understand that not only does the New York Convention contain grounds on which enforcement may be refused, but the courts of different jurisdictions have interpreted those provisions differently and the procedures for enforcement differ significantly between jurisdictions. Those procedures can range from a largely paper exercise through to a virtual re-examination of the merits of the dispute.

An appreciation of these variations at the outset can allow parties to structure their transaction so as to avoid jurisdictions which impose high hurdles to enforcement or to take mitigating steps to reduce their impact.

The attitude of national courts to enforcement of foreign arbitral awards against the state or state entities is of particular concern where state parties are involved in a project. Practices vary, but often there is a perception that national courts will be more reluctant to permit enforcement against the state than against a commercial party. Again, an appreciation of these variations at the outset may allow risks to be avoided or at least mitigated.

Investment treaty protection

One means of potentially avoiding the reluctance of national courts to enforce awards against state entities is to seek protection under an investment treaty.

In broad terms an investment treaty is a bilateral or multilateral agreement between nations to ensure mutual protection of private investments flowing between member states. The nature of available protection and the procedures by which it is accessed are dictated, not by the terms of commercial agreements specific to an investment, but by the terms of the relevant investment treaty.

One important difference between investment treaty arbitration and commercial international arbitration is the means of enforcement of awards. Investment treaties commonly (but not exclusively) provide for arbitration administered by the International Centre for the Settlement of Investment Disputes (ICSID). Awards by ICSID tribunals are not enforced via national courts, thereby avoiding any reluctance of such courts to enforce against state entities. Rather ICSID, as part of the World Bank, relies on a state’s reluctance to damage its relationship with the World Bank to ensure compliance by the state with ICSID awards.

In terms of the nature of protection available under it, this depends on the terms of the treaty in question. However, forms of protection commonly provided for include:

  • Protection from expropriation/nationalisation – each state agrees that it will not expropriate or nationalise (or take any step having an equivalent effect) any asset or investment belonging to nationals from the other state.
  • Most favoured nation and national treatment – each state agrees that it will treat investments made by investors from the other state in a manner that is at least as favourable as the manner in which it treats investments made by either (i) investors from other states or (ii) its own citizens.
  • Repatriation of investment and earnings – each state permits the unrestricted transfer of investments and returns made by nationals of the other state.
  • Observe contractual obligations – each state agrees that it will observe any obligation that it has entered into with investors from the other state. This type of provision (known as an ‘umbrella clause’) may therefore give treaty protection to any obligations undertaken in a contract between the investor and the state.

Investment treaties can therefore provide powerful protection for commercial parties embarking on projects involving states or state entities (which may be particularly relevant where a state entity is a local partner in a real estate development). However there are procedural and substantive hurdles to overcome to invoke that protection including the following:

  • An investment treaty must be in place between the investor’s state and the state where the investment is to be made. It may be possible to incorporate an investment vehicle in a particular jurisdiction to take advantage of a particular investment treaty, though treaties may contain restrictions on such ‘post boxing’.
  • The definition of investor differs from treaty to treaty and the investor must comply with this definition to obtain protection. Again an investment vehicle may be designed to comply with these requirements.
  • The definition of investment also differs from treaty to treaty. It may be possible to structure investments in order to meet these requirements.
  • Protection is only available in respect of the acts of states and state bodies. Investment treaty arbitration is not available for resolution of disputes between purely commercial parties.
  • As with commercial arbitration, the resolution of certain issues may be specified to be the exclusive preserve of the national courts of the relevant state. It is important to appreciate any such limitations from the outset.

Procedural requirements such as the requirement to exhaust local remedies (e.g. national courts/commercial arbitration) and to observe of a cooling off period may need to be satisfied before any investment treaty arbitration can proceed. It will be important to take into account the time and cost involved in complying with these requirements in assessing the suitability of investment treaty arbitration as a source of protection for an investor.