With soaring building costs and interest rates on the rise, builders and property developers are seeing their margins eroded and losses accumulating from development projects.
Property development disputes between builders and developers are not a new concept but are likely to escalate as development projects become unprofitable and losses start to accumulate.
It is common that development projects will incur cash outflows and losses during the construction phase as property acquisition, project building costs and funding costs are incurred before any realised sale proceeds are received.
Pre-sales often only secure third-party bank funding for a portion of the overall development costs.
Conflicts can arise as the builder seeks to protect their profits through variations and the developer their profits from the ultimate completion and realisation of the complete project - even more so when the builder has a stake in the development.
The recent matter of Pugwall in the County Court of Victoria1 highlights the extent to which disputes of this nature can arise.
Common reasons for disputes include handshake, unwritten or incomplete agreements:
• Sub-contracting services to related parties (documented or otherwise)
• Unclear terms for provision of related party services, such as project management, on-site supervisor roles, other administrative functions
• Funding arrangements (especially in circumstanced where security is over unrelated properties or third-party lending via a back-to-back arrangements with related entities)
Traditionally disputing parties have engaged lawyers aided by forensic accountants, quantity surveyors and other experts to calculate and quantify loss claims and counter claims.
More recently the courts are seeking the independent expertise of forensic accountants to assist in undertaking a forensic audit, and reconciliation of the financial aspects of the project.
This may include various scenarios and assumptions to deal with disputed facts or inconsistencies between various documents and agreements.
If you need help with property development disputes, our team of forensic accountants can assist with undertaking audits and reconciliations with regards to the financial aspects of your project today.
1 Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd & Anor [2021] VCC 2053 (15 December 2021)
