When the stakes are high and multiple macro factors are out of your control (think global pandemics), reducing risk should be high on every property developer’s agenda. John Wallace, founder of specialist construction law firm Ridgemont, talks us through what can happen when things do go wrong, and explains the legal aspects of property development you definitely can control.
Full transcript of episode here
0:00 Ian: Hi all and welcome to Brick by Brick the podcast of the property development industry. My name is Ian Humphreys and I am a co-founder of Brickflow and one of your hosts. Each week we will be speaking to experts and stakeholders from across the property development sector. We will share ideas and advice on how to get ahead of the game as a developer. As well as trends and insights from across the sector. The series is designed for all experience levels, whether you’re just starting out on your property development journey or you are an industry veteran. We will handpick topics with universal appeal so that we can all continue to learn. We would also love you to share the podcast with your development industry network. Our mission through Brickflow and the podcast is to make development finance better. Every year somewhere between a third and a half of all SME property developers sight the lack of finance as the main reason they don’t build more. Its only through raising awareness of the problems that developers face that we will improve. The more people that hear this, the more the industry will pay attention and the better it will become for all of us. So please share as far and wide as you can. We also really want you to join the conversation if you have any suggestions for future topics or guests or thoughts on any of the podcasts, we would love to hear from you. Get in touch through LinkedIn or Facebook or email us at firstname.lastname@example.org. I hope you enjoy the show.
1:32 Ian: This week I’m delighted to welcome John Wallace from Ridgemont, Ridgemont are a specialist real estate and construction law firm based in London. The main reason I wanted to get John on the show, is for him to explain what specialist construction lawyer’s role is, in the property development process. For most people it’s a bit of a dark art and perhaps an underappreciated skill. We speak with less experienced developers who believe that the person who did their conveyance for their main residence or their last buy to let, is also the best person to advise them on all thing’s construction. That might be the case, and they might very well be a specialist construction lawyer, but the chances are that their regular property lawyer who will concentrate on the land acquisition part only, whilst they would reach out to someone like John to help with everything else. Property development is high stakes and like a lot of other things in life, if you don’t take the right advice, or pay the right price for your advice, then it could be very costly later on. So welcome, john.
2:33 John: Hi Ian, good to be here.
2:37 Ian: Good to see you. So, we’d like to start off by asking everyone about their journey, how they’ve got to where they are today. You know, a bit about your background, your career today. What first attracted you to the property sector? And why do you love what you do? Do you love what you do?
2:55 John: Yeah, luckily, not everyone does, but I do. So I read law at the University of Liverpool then lectured at the University of Bordeaux for a year in contract law. Came back, went to Nottingham law school. Then trained and worked at eversheds in London and Paris. So in Paris I qualified into real estate finance, acting mainly for one UK funder, securing large lanes over chateaus, vineyards, golf courses. My daily commute was walking under the Eiffel Tower across the bridge to work. It was pretty ideal.
3:35 Ian: You’re French is pretty good then aswell?
3:37 John: Yes, not bad. I still practice a little bit in French at the moment. I’ve got a client who is actually Spanish. And we speak in French because it’s our common language. But yeah, the 2008 recession hits, there was no financing going on, no property deals. So I retrained as a property construction litigator, which I thought would be a bit more recession proof. And then five years ago, this month, we launched Ridgemont. And Ridgemont specialises in real estate and construction matters. So, anything contractual or any disputes, is our expertise and that’s what we focused on. Now, I’m really lucky that I love what I do. I’ve always been interested in property before I qualified, I paralegaled in the construction team of, a Mayfair law firm. And then when I did my trading contracts, I made sure that my first seats was in real estate. So I’ve always been interested in and now I get to practice law in a really interesting context, talking about, apartments in Super prime locations, big developments in central London, that sort of thing. And to me, that’s really, really exciting.
5:00 Ian: Great. Do you have property in the family? Is there interest? Is your father, a property developer or anything like that?
5:08 John: So, my dad was a teacher, my mom was in a bank as a bank clerk. And I was the first lawyer in the family and had no construction connections.
5:20 Ian: Who is Ridgemont? Is it you and others?
5:25 John: It’s my firm. And then we’ve got a team of very experienced construction and property solicitors. Three of whom have been working construction for over 20 years. And so, I have got some grey hair now, but they’ve definitely got the grey hairs, for where that’s needed.
5:49 Ian: Yeah, some people just want to see grey hair.
5:52 John: They’re getting more and more these days, let’s put it that way.
5:55 Ian: Okay, great. Thanks for that. So can you explain to the audience your potential role in property development transaction. So when people tend to hire you, what’s the scope of a construction lawyers services?
6:10 John: So we’re generally involved across the projects, say, from looking at funding agreements, to construction documentation, which is the contracts, collateral warranties, bonds, etc. And then ad hoc advice along the way in terms of how to interpret the contract dealing with issues as they arise. And then of course, real kind of niche is advising on disputes, which often go to adjudication but can also go to the to the court.
6:43 Ian: Most people, not all developers, but perhaps less experienced developers will just reach out to the guy that did the conveyance on their main residence. So would they work with them and do or would It’s better just to work with someone like yourself or, is there a right or wrong?
7:05 John: All I’d say is that construction law is a very specialist area. So the legislation is very technical. The contracts as drafted are very complicated. And there’s a huge amount of case law. And I’ve got a lot of respect for kind of generalist lawyers. I think there’s a place in the market for them. But I think if you are embarking on a development, and it’s, costing a significant amount of money, then you do need specialist construction lawyers, there’s no doubt about that.
7:36 Ian: Give me give me a couple of examples, case studies, things that you’ve done recently, where, there’s definitely been a value add.
7:49 John: Well it can be very simple, so this last week, I’ve been advising a new developer, fairly substantial first development. They’ve been advised by they’re architects and they’re kind of local lawyer. And the first thing that I realised was they didn’t understand the contracts the mechanisms within the contract. And that seemed crazy to me that they were going to invest a huge amount of money and not understand how the contract work. The second thing is that the architects have drafted the contract and hadn’t drafted any amendments to the contract. Now, certain contracts lean certain ways, in the JCT suite of construction contracts. This one in particular is his contractor lens in that it’s some of the terms of favour the contractor, so you have to amend them by a schedul to the to the contract, and they just hadn’t done that because architects aren’t lawyers. That that seems to me to be a big gap. So we’re now instructed to produce those under time pressure. And without that, things could go really well for the first three or four months of the build. And then you find something happens like COVID-19. And then they turn to the architect and the architect says, I don’t know what to do.
9:14 Ian: I think we’re what we’ve seen a lot of, at the moment is supply chains under pressure. Perhaps that that seizing event now but a couple of months ago, when we were right in the middle of lockdown, and you’ve seen people that wanted to be on site, but just couldn’t be on site because, through no fault of their own or their contractors, but there’s nothing, you can’t legislate for that.
9:44 John: You can legislate for it. Legislation arising out of COVID-19 in respect of pandemics. But I think, the problem is, supply chain problems, so builders merchants closing and there was there was some confusion as whether they had to or not you know, bags of cement being sold on eBay, you know that normally five or 10 pounds being sold for 55 pounds a bag?
10:08 Ian: Yeah they did do that.
10:09 John: So yeah, difficult situation. And of course, you can’t build without materials, that’s for sure.
10:16 Ian: But in in that scenario where you’ve got a fixed price contract and delivery time schedule, what happens, Is it just a case of let’s check the contract, how do you work it work it through?
10:36 John: I mean, it’s quite a complicated issue, but in a nutshell, you can have clauses that deal with increasing costs. You can have clauses that deal with force major. Traditionally, force major doesn’t cover things like a pandemic, because there’s been so few of them and I know that there are lawyers is in London at the moment looking at the definition of force measure in the French Civil Code. Because in some contracts, it’s not defined and say, there’s going to be a huge amount of dispute in the third and fourth quarter of this year relating to delays and extensions of time caused by COVID-19.
11:22 Ian: One of the things that we saw, and we hear about a lot, is lenders extending their loan terms. And, some lenders automatically extended everyone’s loans by two or three months, but there’s a process for that as well in terms of has to go back to credit has to be agreed again, then there’s a case of does the loan still fit within the original metrics, the regional covenants, have GDP change, and all this kind of stuff. And then there was obviously surveyors and QS’s couldn’t get out to the site. So, it did cause a lot of problems. And have you started to see anything from your clients where there’s going to be disputes with lenders, or is it going to be, something that’s going to take a little while to work out?
12:18 John: I think it’s really interesting that the banks have taken a collaborative approach and do seem to be on the side and trying to help as much as possible. And I think what we’re seeing is that they’re looking for developers, to be less leveraged than they were pre COVID. We’re also seeing that they’re open to COVID style clauses being inserted in respect of a possible second wave of the virus and possible restrictions on construction during that second wave, and perhaps we’re seeing some lenders being unwilling to lend on developments where apartments are going to be and also the upper end of value scales. Or where there’s sort of potential complications in terms of values further down the line, I think there’s some concern that house prices are going to fall. I’ll let others make a decision on whether that’s going to happen or not. But I think that it’s definitely playing on the mind of the lenders. But having said that, you will know better then I, the lenders want to lend and yeah, that’s how they make money.
13:32 Ian: Yeah, what was interesting is really the division between the types of lenders and their behaviour throughout so the banks were was still very much open for business, or be it they may have reduced their leverage. But whereas we saw the funds, they were non-banks, and they were perhaps more ready to put things on hold. The thing is down to a couple of reasons. Firstly, they don’t have as much control over their funding, they’re normally beholden to another investor. There was probably a lot of checking that their existing pipeline was correct, and that they still have the backing of those lines. But also, most of the non-bank sector especially, they’ve only really known good times. Back in 2008 2009 there wasn’t a non-bank sector, you borrowed from the bank and that was it. So, these sort of lenders that are in the space now, which do an amazing job and offer such a wide range of product for developers which is fantastic, mostly will have only known good times. When you get to a situation like this where perhaps we are teetering on the edge of recession, they are naturally going to be a bit more nervous. And there’s probably going to be some, deliberation, whether they just carry on regardless. So I do think there is a bit of that.
15:13 John: Yeah, I can understand that. And I think another issue that the lenders are thinking about at the moment is the strength of covenant from the contractors, you say is the contractors, likely to go under, all the contractors are under pressure at the moment. I am advising a number of contractors at the moment who are just not being paid. And, they have staff on furlough in the furlough scheme or end. So there’s a lot of question marks over contractors and I think the that if I was seeking finance now, in relation to the development, I’d be looking for a contractor who’s been around for a while, has good financials and a good reputation, that’s for sure.
15:56 Ian: Yeah, it’s interesting to me, some lenders have always had the rule around contractors as to what they’re looking for, and some are starting to introduce it. And we commonly see a multiple of turnover versus contract value. So if your contract values a million, they want to see 10 over three or 4 million, for that to apply. But I guess you could look at it the other way, because we’ve had some instances of developers, we’ve spoken to who their contractors has gone under not necessarily due to COVID. But in that instance, if you have the experience, would you perhaps go the other way manage your contracts yourself. And because then at least you have and this would be only obviously available to an experienced developer out there, perhaps even has a background themselves as a contractor or project manager, would that be something that you think you might see more of?
17:05 John: I mean, that ultimately it comes down to a commercial decision. I think a lot of developers wouldn’t have the expertise to do that, even if they think they do. I think it’s also nice to have a main contractor on the hook if something goes wrong. And particularly if, for example, the subcontractor was to go under. But yeah, I think we might see more of that. And I think developers might be forced to be more creative over the next one to two years and so until we get back to some kind of normality, and the lenders have more confidence.
17:45 Ian: Yeah, one thing I should probably know from a funding perspective, most lenders prefer to see a main contractor in place because obviously step in rights are easier to enforce if there is a main contractor. If you’ve got, you know, 10 different subcontractors is a much harder position for the lender to step in and carry on. So the lenders will normally ask for that. But, if all your faced with is these contractors that you don’t think will there at the end is kind of which is the lesser of two evils.
18:23 John: But the other is profit, right. Because if you can knock off the main contractors overhead then.
18:29 Ian: Yeah that the attraction for most developers. Okay, and you touched on earlier, just with performance bonds and collateral warranties. Do you want to explain those points a bit more because I think to some people they are they hear them but perhaps don’t quite understand them.
18:53 John: So, collateral warranties are the key documents that a lot of people don’t understand. And it essentially, they’re very simple, in that in a situation where you’ve got a lender, employer, main contractor and subcontractor. It enables the employer and potentially the lender to sue the subcontractor where otherwise they just wouldn’t have any contractual right to do so. So for example, if the, the main contractor was to go under, they’d still have that cause of action that right to sue, the subcontractor. It is absolutely essential for lenders for obvious reasons, but equally safer for clients for employers. And to be honest, they’re mainly on standard terms, and they’re not lengthy documents. So if you get hold of one and read it, they are fairly straightforward, but sometimes the concept is a bit strange to some people.
19:58 Ian: And performance bonds?
20:01 John: Bonds are there, for example, where there’s some concern with, for example, the contractor, the main contractor, and that is them putting down some security to ensure that they’re going to perform the contract. Again, they tend to be, fairly straightforward documents, but I suppose the devil is in the detail. The value that we add is to make sure that there is favourable to the, the contractor or the lender as possible.
20:35 Ian: Do you think they’re worthwhile? Are they something that you generally tend to say to people to take if they’re available?
20:45 John: You ask a lawyer whether an extra layer of securitization is a good thing. And the answer is a very definite yes.
20:54 Ian: Are they worth the paper they’re written on? Is it just for show? Do you actually see them ever been claimed?
21:05 John: Yeah, for sure, in this case law regarding that they do get claimed upon? But obviously, if a contractor goes under, the bond, it’s fairly meaningless.
21:17 Ian: Yeah. Okay. Thank you for that. Let’s get a bit more into detail on the finance side. So when we’re working with a borrower, we will always ask whether they have a specialist construction lawyer. So a lot of foreigners who will speak with their lawyer at that point, I would say yes. Whereas reality is they don’t have a specialist in house. They probably have, a generalist as you touched on earlier, and then maybe reach out to someone like yourself, if we’ve got that situation. How much of your work is done on that basis where you’re being outsourced to or how much he’s done where you’re going direct with the client.
22:01 John: We do accept instructions from other law firms that don’t have construction departments. We’re in a lucky position where there’s actually very few specialist’s construction law firms in the country. There’s even, not many small to medium sized law firms that have construction departments say, we do get instructions from other law firms. And we’re happy to do that, provided that we see everything. But normally, were engaged directly from, the start of the journey, right the way through to the end. And I think that’s probably the preferred way because it means that we don’t miss anything. And we can stop issues arising before they happen.
22:48 Ian: So if I if I’m looking to buy a piece of land, let’s say I’m buying something that has permitted development rights, I’m considering whether to enact them or to knock down and start again. I’m just going to be to get separate planning for that. But let’s say I’ve got, a sublease with an existing tenant. You could advise on all of this as well. So you could obviously go through the tenancy itself and then work with me on the planning. I mean, how would you role work?
23:20 John: I think it’s really important that we get engaged prior to heads of terms being agreed. Often, the legal and commercial points that we bring to the table will affect the amount that is being agreed in terms of the acquisition price for land or property. Often the client doesn’t see the problems that arise further down the line. And if the if the heads of terms have already been agreed, albeit they’re not binding in this country, it’s very difficult then to get trapped back over them and say. Well, actually, I don’t want to pay that much for it.
23:58 Ian: Yeah, you’ve lost your leverage. Okay it’s really interesting. You kind of touched on it there the residual land value, that’s the same as always, that’s where developers make their profit, right in the in the land purchase price.
24:17 John: We often see first time developers overpaying for land and it’s then very difficult to claw yourself back to profit.
24:26 Ian: Yeah, you’re constantly chasing your tail.
24: 29 John: Land prices at the moment are high. I think there’s too many developers who are going in blindly. And that normally comes with a lack of experience, paying too much for the lands, perhaps underestimating the cost of construction and then running into difficulties along the way, you suddenly are in a position where you’re lost making.
24:53 Ian: I think we hear of it and you do see it from time to time as well. But people, walk away, sometimes flat, sometimes negative, it normally comes back to paying too much for the land. If you go into a proper contract with a contractor, unless they go under then you would expect the build cost to remain fairly static. And then you’ve also got the GDP, again, unless there’s like a 2008 type recession, you’d expect that to be fairly constant throughout. So is really the land price that kind of dictates that profit and success.
25:37 John: I think there’s also a chipping away on profit from having insufficient contingency monies for the cost of construction. And then when that’s factored in with lower set on prices per unit, that’s where you can run into difficulties as well.
26:00 Ian: We’ve obviously we talked about fixed price contracts. I mean to most people fixed price contract means fixed price. So, there is a contingency in there, as we all know that. Now lenders generally insist on a certain percentage as a contingency. But then they also want to see that there’s enough buffer, the client holds personally to cover cost overruns. So there why is that we’ve got fixed price, but then we still need to hold back, half a million quid to cover the what ifs?
26:29 John: I think that’s because there’s not really a fixed price construction contract. There’s going to be variations along the way there’s going to be issues on site that have to be overcome. Often the employer will change their mind about certain things or seek planning permission, again, to improve the permission they’ve already got, which involve further costs. And so this idea that there’s a fixed price is just not right. I’m advising A developer at the moment in a similar situation where they’ve gone massively over budget. A new developer, they thought it was a fixed price contract of course it wasn’t. And now they find themselves in a situation where they’re gonna have to take additional funding and you will tell me it’s very difficult to go back to the funder at that stage and say, we got our maths wrong.
27:24 Ian: Yeah, absolutely. It is a question credibility for one, but normally most borrowers take it they’re borrowing up to the hill of what that that then they will advance and especially in the current climate, where you might have seen a little bit of heat coming off the prices as well. They’ve probably negotiated this loan at point in time when TBDs were a bit more bullish or certain valuers would have been a bit more bullish. And now you’re going into a situation where the lender might be on new applications and taking reduce leveraged position and you’re trying to extend existing loan in the current environment I can see that being very difficult but what I would always say to your client and to anyone is that if you do run into difficulties, be the lenders best friend because they will work with you. What I think is perhaps a bit different even with some of the bigger banks with developed finance is it there is still like a lot of personality and relationships involved with it and these departments even within the big banks have quite a good degree of autonomy. So if they say look, John’s behaving really well and, yes, he’s over budget but he’s given us weekly updates and we know exactly where we stand that’s a much easier sell to, the people higher up the chain that are deciding whether to advance, the extra hundred thousand, couple hundred thousand that is needed. Whereas, if you got a guy just sticks his head in sand and it just goes incommunicado, then they’re the ones that the lenders are going to have to appoint receivers and get nasty. I’m sure you’re telling him the same thing. That Yeah, definitely don’t go dark, I think is the advice. Okay, so going back to the contract when sort of lenders are involved. What the lenders typically insist on as a sort of standard. I mean, we’ve touched on collateral warranties and things like that. Is there anything else that you know, that borrowers should be aware of?
29:48 John: What I would say is that the starting point for this documentation is quite standard. It doesn’t change an awful lot and depending on the size of the borrower and the size of the amount they’re borrowing. The lenders can actually dig their heels in the sand and refuse to negotiate a lot of the points because they want to keep their loans on standard terms. They know where they stand. And you can understand that. Obviously, the more that you’re borrowing, the more there is flexibility there. Typically speaking though, you’re having a substantive funding agreement, you can expect to see perhaps a personal guarantee, performance bond that we’ve discussed, the collateral warranties in favour of both the employer and the lender. And then the, the appointments and so forth. The lenders want to see that the documentation is fully in place. And it’s kind of comprehensive. And, and that’s why you need a construction lawyer because that’s our bread and butter, what we do every day.
31:00 Ian: Do you work both sides, client side and the other side?
31:05 John: Yeah, we work for some funders and we work for clients as well. And I think that gives us an insight into what both parties are looking for in the in the arrangement and everyone wants to get to the point where the money is drawn down. And so be collaborative, try and understand your opposing side and try and get everyone there with an agreement that both sides are happy with.
31:31 Ian: Yeah, I think that’s a great insight, isn’t it when you’ve worked both sides, because then you know, what they’re perhaps willing to bend on and what’s just a waste of waste of breath as it were? I think we saw a recent example where the Burroughs lawyer raised 46 objections to loan agreement. I think the lender moved on two of them. So is that the norm?
32:00 John: I mean, that strikes me, and I don’t know the lawyer, but it strikes me as someone perhaps who’s not used to negotiating these agreements and doesn’t understand the response of lenders in those circumstances. I mean, 46 amendments, you’ve got to ask yourself unless the document was very badly drafted in the first place. It sounds like it may have been amended for the sake of being amended.
32:24 Ian: Its certainly brighter on the other side.
32:25 John: Yeah, for sure. And it covers all papers being pulled and you lose the funding. I’ve been advising a client this week. And I advised them that there were a number of issues with the contract, I said that ultimately the funder is not going to move, but there is one there’s one element of it, which has to be changed a key points and we will get that change. But if you go to them with 46 points, then they’re going to think that your client is inexperienced and doesn’t understand the game, and that’s gonna raise red flags.
32:57 Ian: Yeah, I agree. Okay, have you seen documentation changed over the years? What do you see now that perhaps you wouldn’t have seen five years ago or even pre financial crash in 2008? How’s the documentation changed? And is it more favourable now to lenders, I presume is that they keep learning and putting more clauses in.
33:29 John: I think it’s genuinely generally Titans. I think that post COVID it’s gonna be really interesting to see what happens once lenders have sat back and considered their position because at the moment, everyone’s hoping that the property market is going to bounce. And the lenders not really tightening up too much at the moment. And they’re allowing these Covid causes in, quite a lot of the time. And I’ve got a feeling that post COVID. I would have thought second half of this year. We’re gonna see a tightening of what they’re prepared to negotiate on within the funding agreements. I think they’re definitely going to require less leverage, more security. And you can understand that because at the moment, we don’t know where the housing markets going. We don’t know where the commercial office markets going to go, retail is in a hole. What was very sexy student housing. Well, that’s worthless at the moment, because there’s no students going to university and we don’t even know where they’re going to university come September. There’s a lot of unknowns for lenders at the moment. And I think perhaps that goes back to some advice that you’d give developers when approaching lenders in terms of setting out what you’re trying to achieve as clearly as possible with as much evidence as possible as well.
34:48 Ian: Yeah, absolutely. I mean, we’re looking at some hotel deals at the moment, which I think developments quite a lot different to a lot of other parts of the industry where you’re raising funding on property because, what you’re building is two, three years away from delivery. So, the now is not necessarily what the product or the situation is going to be in two or three year’s time. So, I do think lenders are a bit more pragmatic and take that point of view. And, you know, if you’re a bridging lender applied to that lender, what’s happening today with COVID, and all those things needs to be a bit more at the front of mind. I think when you’re delivering a hotel that’s, three years away from completion, then hopefully, today’s or what’s been happening the last few months is a is a distant memory, but it’s no doubt going to impact how the funding is, underwritten, but think also as well, not the sad thing, but the big downside for developers at the moment is how the properties going to be valued, because a valuers job is incredibly difficult to do really feel for them. But, they can be pessimistic on things. Whereas again, if we do have a quick bounce back, in a year’s time, and there’s a vaccine and everything looks quite rosy, that pessimism is perhaps on juice. So it’s a very tricky situation. But I do think, as you keep saying about, towards the end of the year, you probably can see more difficulties coming out there who actually have, a positive info for developers anyway impacts on land prices. So, do you think you’ll start seeing some, land price changes, maybe q3 q4 q1 next year, because at the moment, what we’re seeing is and you may feel safer. And what we’ve seen is sellers just, this has not touched their opinion and what their land is worth.
37:01 John: Yeah. And I think that the issue is, that there’s still great demand for land, particularly in London, there’s still huge demand for it and then in terms of commuter as well, you see it, but I agree with you, I think that post October, end of the summer, October, November time, there’s gonna be a lot of redundancies across the UK, and that’s gonna have a huge impact on the housing market. And that’s when we’ll see land prices fall. And it’ll be interesting to see the impact that has on lenders appetite to lend.
37:33 Ian: Yeah, do you think you’ll see a flight to, the country? Personally, when COVID struck, we actually went down to Bristol and live with my mother in law for a couple of months and, that’s partly because we just had a baby so it’s helpful to have an extra set of hands but also just didn’t feel that safe in London. So to be outside in the country, to be able to self-isolate a lot easier. Do you think that’s going to play on people’s minds and demand and things like that?
38:13 John: It’s a really interesting question. And I’m really interested to see how quickly London gets back to normal. So already I’ve been into the office three or four times since lock down. And each time London has been a bit busier, the roads have been a bit busier. And I’m going in on Monday, and so I’m expecting to see again, it be busier. And by July, if the two metre rule ends, lots of people will be back in offices. There’s, talks of the pubs opening, restaurants opening, and the sooner that we get back to normality, I think the less of an impact it will have on the housing market. A bigger impact will be the economic situation, with furlough ending, causing redundancies. Across sectors, which will ultimately mean that there’ll be a reducing demand for housing.
39:14 Ian: Yeah. What about in a work? How people use workspace? One of the things I think that you might see a bit more of is people taking longer weekends, right. So if, technology allows and employers and perhaps be more flexible, and why live in London, if you can live, two hours away, and you’ve only got to come in once or twice a week, it surely will make more sense. But then in terms of offices, if you own a development or you own a piece of land, which has panning for offices at the moment, do you just go into it quite bullishly and think that this is not going to have an impact or do you, perhaps start thinking that I want to try and do something else with this stuff.
40:10 John: I think Luckily, that’s not my decision to make. But I think there’s definitely concerns in the market about it. And we may get to a situation where developers choose not to convert under PD, well have to wait and see about that. I think more generally, there’s definitely going to be an appetite for people to work from home. And we’re in the fortunate position at the moment where we are recruiting. And during one of the interviews, the candidate made clear that they had enjoyed working from home across lockdown. And it would be a requirement that she could work from home two days a week. And I don’t mind that at all, to some employers that that might be an issue. And from another legal spin on that is that we’re going to see a lot of employees making flexible working requests to continue to work from home. And it’s gonna be difficult for employers to turn that down where those individuals have successfully been working from home during a lockdown. Now what happens then when I don’t know, a large corporate has a huge amount of space that they’ve leased, and half the workforce wants to work from home? That’s a problem.
41:30 Ian: Yeah. My wife works for a very large software company, and they’ve never had enough space for all of their people in the office at the same time. They’ve always relied on only 80% of the workforce been in at any one time. But I guess hot desking and things like that are completely contrived with, to meet rules, so let’s see how that plays out. But I can see a lot more of that, people taking less space and just allowing more. If everyone in London takes 20 30% less space, what’s the knock-on effect of that.
42:14 John: The knock-on effect is huge. I was speaking a couple of weeks ago to one of my serviced office provider clients, they’re expecting to be busier post COVID because they think that larger companies are going to look, for rather than having one large space, a number of smaller spaces that can be more agile, and they can hot desk. Who knows what economy, what’s going to happen to the economy. So if you’re going on a 12 month contract, you can get out it’s much more flexible, and so I think they’ll be okay actually. I think we might see a lot of empty office space, particularly the mid to large area size office space. Initially, and it’ll be interesting to see. So if there’s is this appetite for people to work from home, let’s say over the next two years, whether that then recedes, and actually people start missing the office, because there is two key things to having an office one is juniors learn a lot, and senior guys can and women can also learn a lot from each other. And, then the other point, of course, is the social aspects say, you know, from working in London that, a lot of deals are done over, you know, over a table over lunch, or beer after work. And I think people will miss that. And whether that happens now or that happens in a year or two, we’ll see.
43:49 Ian: Yeah. I agree with all of that. Okay, so moving on, as you know Brickflow is very much about introducing more technology into the sector as a whole. And to online industries horribly inefficient. And the commercial real estate sector is probably the last industry anywhere. They’re still in the main, untouched by technology. So we always like to finish by asking you what your views are on technology in the sector, and in the commercial real estate sector, and also more specifically, your sector and legal sector as well. Where were the quick wins? Perhaps some of the things that have been forced upon us in the last few months, you know, probably things that were overdue, and now they’re just normal. But, where do you see the sort of near future and perhaps the longer-term future.
44:48 John: I’ll start with the law, and I’ll talk about constructions. So it’s already been said that in terms of hearings, we’re not going back to the old way. So virtual court hearings have worked so well. That the courts are saying that actually for a lot of hearings that’s appropriate. It’s not gonna be appropriate for everything. So for example, if witnesses are giving evidence in court and they’re going to be cross examined, then you kind of want your barrister to be in front of them, putting them under pressure. Well, there’s a lot of administrative hearings in legal proceedings, and there’s absolutely no reason why they can’t be virtual. And it saves a lot of travel time. And it’s much more comfortable for everybody. So I think that’s going to continue. Law has got a long way. And when I say law, I mean law firms have got a long way to digitise say, most law firms that say they are tech savvy, will have cloud based practice management systems, enabling them to work from home and then some will have some client side tech, that’ll enable clients to access documents, there’s not a lot of tech that’s being used at the moment. So we’ve got things sort of, if there’s 10,000 documents to go through, there’s artificial intelligence software that can go through them on your behalf. It’s a great deal of accuracy. But I think we’re gonna see more of that so and what the clients want to see, they want to see more client-side tech, because there’s only so much you can do in that respect. What they want is law firm side tech, which makes law firms more efficient, easier to deal with. And when we say more efficient, that means that the law firm then has to pass on that efficiency to the client, because at the moment, law firms advertise that they use AI to make themselves more efficient. But that saving doesn’t get passed on to the clients, I can see the clients going to be smarter to that. Construction, you’re absolutely right, is the last bastion of the pen on the back of an envelope. And that’s going to have to stop, we’re going to see intelligent contracts, we’re going to see apps being used. So for example, I know of an app being developed at the moment in relation to mental health on sites. There’s already existing things like that, regarding health and safety on sites, virtual training, I think there’s going to be more about some kind of idea of an intelligent contract, which kind of changes is collaborative, right, this idea of collaboration, where everybody wins. So in the moment contracts are the way that construction contracts are drafted is there’s a winner, there’s a loser, but ultimately, at the beginning of that journey, the development journey, all the parties want to get to the same position, which is, built out and sold, and I think where we’re going to see change over the long term and I mean, 10 20 years is a movement to some form of intelligent contracting that does that, that brings the parties together, that’s gonna involve legislation though, because at the moment, it’s very adversarial and they’re gonna have to legislate to change that. And that has to change. And the other area finally is actually in the way that we build. So the way that we build is fundamentally the same as the Victorians built. So we’re going to see an increase in modular building. And I think there’s going to be further advancements over the next 20 30 40 years in the way that we build. Building quicker, smarter, more environmentally friendly. That’s got to happen.
48:42 Ian: Yeah, I think for the for the modular, do you take any different approach with modular than you would with standard construction?
48:52 John: There’s obviously is a different approach to build because most of the work is done off site.
49:00 Ian: I mean, in terms of the legal documentation, contracts?
49:06 John: They are slightly different. But, but fundamentally, they cover the same points. And there’s no reason why the law should complicate advances in technology. It’s just normally the problem is that the law needs to catch up all the time. So when email was introduced, a lot of things like notice provisions in contract and allow for email. That’s something that the law had to change, equally as we move on now, into E signatures, which are still widely used, but perhaps not as much as you’d think. So for example, all our letters of engagement, are E signed now? Because frankly, I can’t imagine anyone wanting to print out the letter of engagement, sign it and scan it back to us. So we’re going to see, I think the law will have to catch up all the time. And it was a really clever legislation to legislate for tech ideas that actually don’t exist at the moment.
50:13 Ian: Yeah. Agreed. On the on the funding side, with modular, some lenders are okay with it, but most are still sort of waiting to see what happens. I think the big problem is, is obviously, a lot of the cost is borne up front and before you’ve actually added any value. So you’ve got a piece of land, and normally with traditional construction, you put some foundations on and you start building up and it’s becoming more valuable the whole time, whereas modular, you have a piece of land, you can contract, a modular construction firm building in the factory, and the land isn’t getting any more valuable and the thing is there’s that issue But also, there’s the resale, ongoing value, how do these things sell? Are they as desirable? How do they resell? These are the things that, we’re only going to find out over time.
51:18 John: I’d point to other markets, say for example, huf houses have been very popular in Germany for a long time and have done very well. So I think there’s an issue in the UK market, for modular homes were there’s too many suppliers of modular build kits, and that’s going to consolidate over the next five years. And over the same period, I expect lenders to get more comfortable with lending on it because it’s the for now it seems to be the future.
51:50 Ian: Yeah, absolutely. We had a borrower do bathroom pods into a block of apartments and he says it’s phenomenal the time saving. The cost was pretty much same, if not a bit more, but the time saving was just huge.
52:17 John: Even if you count the time spent manufacturing, its still quicker.
52:22 Ian: The time lapse videos you see where they start putting these things together is incredible as well.
52:28 John: I like that story about China opening a hospital in nine days. Obviously its longer because the whole thing has to be manufactured in a factory that it’s a nice story.
52:38 Ian: Yeah, absolutely. I don’t know if you’ve seen as well, the 3d printers with concrete? So they can put up a house perimeter and whatever in a very short timeframe.
52:50 John: A lot of concrete gangs are nervous about that im sure.
52:53 Ian: Yeah, no scary stuff. Well, thanks for that, John. That was great. It was very, very interesting. I definitely learned stuff and I think anyone listening would have would have learned as well. And I think, what you guys can bring in a specialist construction lawyer is hugely valuable. And I think anyone should be, should be looking to employ someone like you for any kind of construction. So thanks for joining.
53:24 John: Thanks for inviting me, I really enjoyed it.
53:26 Ian: We’re catch up soon and yeah, see you soon. Take care.
Outro Ian: Thank you so much for listening to this episode of Brick by Brick. The podcast for the property development industry.
I think the biggest take away for me from John today, was one of risk management. Property development is high stakes as we all know. Developers risk potential bankruptcy each time they go into a deal. There are so many macro factors that you can’t control; house prices, currency fluctuations that could affect the prices of materials, pandemics that could shut the whole country down for months. All of these things you cannot control, so why take a chance with the things you can control?
Contracts being drawn up correctly and executed by experienced professionals are as important a part in property development, as who you’re working with. When things are going right, no one will give the contract a 2nd thought, but when things are going wrong you need to know that you are covered. Yes it might cost a bit more to have a specialist like John in your corner, but it will be worth every penny for the peace of mind and cover it will afford you.
Anyway, we’ll be back again soon with another episode alongside other industry insiders, sharing their own property journeys as well as their tips and tricks to help you get ahead in the property development industry.
If you’ve enjoyed this show, we’d really appreciate it if you would leave us a review and share the podcast with your property industry peers. And remember to get in touch about this topic or any future topic by emailing us at email@example.com
Until next time, take care.