REAL ESTATE LAW: Development of real estate projects

Developing a real estate project is a complex challenge that requires companies in the sector to skillfully navigate a highly competitive market. Successfully executing a real estate project not only demands taking on rigorous and often complex contractual commitments but also complying with the technical and legal regulations established by the competent authorities. In this context, specialized legal consulting becomes a fundamental pillar, providing an essential preventive strategy to mitigate risks and optimize results.

In this article, we explore various strategies to address and manage the most common problems faced by real estate developers, from contractual relationships to compliance with relevant regulations. We offer a detailed analysis and practical solutions to ensure the progress and profitability of your real estate projects.

1. Suppliers

Maintaining a good commercial relationship with suppliers is essential for the success of any real estate project, as it contributes to the efficiency and quality of the work performed. However, relying solely on the goodwill of suppliers can be risky and does not guarantee the absence of conflicts. For this reason, the following lines detail how to address the most common problems a real estate developer may face with their suppliers:

• Issues with suppliers: service or work timing

Maintaining a good business relationship with suppliers is essential for the success of any real estate project, as it contributes to the efficiency and quality of the work carried out.. The execution control should be linked to progress reports that must be presented at the conclusion of intermediate deadlines or agreed milestones. This approach conditions payments to effective progress and incentivizes the supplier to meet established deadlines, a situation that often does not occur when the supplier is paid for the service or work in advance.

Another aspect to consider is the inclusion of clauses that contemplate penalties if the supplier unjustifiably delays the delivery of the service or work, or if there is a delay attributable to the supplier in the progress of any contracted items. These penalties should be reasonable and proportional to the potential damage caused by the delay.

Additionally, considering the specific nature of the service or work, contracts must clearly stipulate the delivery modalities and/or procedures, which are as follows:

1. Provisional delivery: It is advisable to establish an adequate period during which the contractor has the opportunity to detect any technical or quality deficiencies in the work or service. If such deficiencies are identified, it is important that the contract provides a specific period for the supplier to make the necessary corrections at their own cost, ensuring that any identified problems can be efficiently addressed without imposing additional financial burdens on the contractor.
   

2. Final delivery: A Delivery and Conformity Certificate must be signed, indicating that the contracted service or work satisfactorily meets the terms agreed upon in the contract. Frequently, contracts stipulate that the final payment disbursement is conditioned on the signing of this certificate to ensure that the supplier has fulfilled all their contractual obligations before considering the contract fully executed.
   
   

•  Service or Work Warranty

In construction projects, it is common for construction defects, settlements, and evidence of technical failures to arise after the work or service has been fully completed and definitively received. Therefore, it is important that the contract includes a clause that provides a warranty covering defects and failures that may arise after the final delivery of the work or service. This clause should specify its duration, scope, exclusions, and the start date, usually from the final delivery. However, in some cases, it is prudent to determine that the warranty period begins from the delivery of the properties to the contractor's clients, as they often have the opportunity to identify issues not previously detected by the real estate developer.

• Contract Termination

It is fundamental that service or work contracts signed by real estate developers with their suppliers include a termination clause specifying situations that will result in the automatic termination of the contract without the need for judicial intervention. This clause should provide conflict resolution mechanisms to minimize risks and potential future litigation and, above all, to give the real estate developer the possibility to continue the project execution as soon as possible.

Additionally, the termination clause or a separate clause should stipulate the means to resolve conflicts that may arise during the execution of the service or work. It is necessary to establish conciliation as the preferred mechanism to reduce or avoid the financial and temporal costs of litigation. Moreover, if conciliation is not effective, arbitration or ordinary jurisdiction should be opted for, depending on the specific characteristics of each case. Although arbitration has gained popularity as an alternative dispute resolution method, it has certain limitations that complicate the application of precautionary measures and the enforcement of the arbitral award. Therefore, it is recommended to agree that any conflict arising from the breach or interpretation of the service or work contract will be resolved through judicial means, ensuring the effective application of precautionary measures and compliance with the judgment.

• Third-Party Damages Due to Supplier Negligence

Finally, another important aspect to consider in contracts with suppliers is the inclusion of a liability and indemnity clause that determines that the supplier will be solely and exclusively responsible for all damages and losses caused to third parties during the execution of the work or service, keeping the contractor free from any liability. This clause should be designed to transfer responsibility to the supplier, obligating them to indemnify the contracting company if it has to face third-party claims due to the supplier's acts or negligence. Additionally, it is necessary to analyze, depending on the cost and/or relevance of the service or work, the possibility of requiring suppliers to have adequate insurance to respond to these eventualities.

2. Clients

The relationship with clients in real estate development has its own complexities and challenges. As with suppliers, contractual clarity and the anticipation of potential adverse scenarios are crucial to minimizing disputes and fostering successful commercial relationships. It is essential to adequately address the most common problems faced by a real estate developer with their clients, as detailed in the following lines:

• Project and Property Delivery Timeframe

The delivery timeframe is one of the most sensitive and critical aspects in the relationship with clients, considering that they plan their financial and familial arrangements based on the delivery time. Therefore, it is essential to establish a fixed delivery period that considers the time needed for obtaining approvals, construction licenses, and administrative procedures for obtaining titles, as well as the project's particularities. However, to protect the company's reputation and integrity, it is prudent to include an extension clause that allows for this period to be extended under unforeseen circumstances such as adverse weather conditions, strikes, delays with suppliers, pandemics, among others, as long as these extensions are reasonable and properly communicated to the client according to the mechanisms established in the contract.

• Defining the Technical Specifications of the Property

Another common source of conflicts with clients is unmet expectations regarding the characteristics and quality of the delivered property. Therefore, it is crucial to precisely define the technical specifications of the property in the purchase commitment contract, including details such as construction materials, finishes, installations, and any other relevant element that determines the quality and final characteristics of the property.

Although it may seem obvious, having a detailed description of the property's characteristics, materials, and accessories helps objectively prevent subsequent claims from clients.

• Including Taxes in the Final Price and Property Payment Modality

In many cases, companies transfer the responsibility of paying the transfer tax to clients, which generates significant tax risk as there may be delays in tax payment or non-compliance. To avoid this risk, it is recommended to include the transfer tax payment within the final price for the definitive transfer of the property, to avoid problems with the National Tax Service and/or Municipal Government, as well as misunderstandings and future claims from clients.

Another important aspect to consider is the property payment modality. It is advisable that contracts clearly establish the payment method, whether it is upon delivery, in installments, or through bank credit, including the terms, conditions, and deadlines of each modality.

• Establishing a Penalty for Withdrawal or Payment Non-compliance

There is a possibility that during the project execution, clients may fail to comply or simply withdraw from the property purchase. For this reason, purchase commitment contracts should establish a penalty regime, which serves as compensation mechanisms for contractual non-compliance, whether due to contract withdrawal by the client or delays in the established payment schedule. It is essential that these clauses are fair, reasonable, and proportional to the potential damage that non-compliance may cause to the developer. The inclusion of such penalties not only serves as a deterrent against non-compliance but also establishes a clear and predetermined method for compensation, thus protecting the developer's interests.

3. Neighbors

An effective tool to prevent and resolve conflicts with neighbors is the creation of a "Good Neighbor Agreement," which includes a detailed description of the adjoining property, general neighbor information, and a photographic and video record of the property's condition. Creating this agreement is an opportunity to foster open and transparent dialogue, helping to build trust and cooperation from the project's inception.

Additionally, it is advisable to establish appropriate working hours to minimize disturbances to neighbors' tranquility. It is also crucial to implement protection measures for both adjoining properties and public roads. These measures include installing safety cordons, security nets, proper signage, supports, and other elements that ensure safety and minimize any negative impact that the works may have on the immediate environment.

The implementation of these actions aims to ensure that the real estate developer minimizes potential risks that could arise with adjoining properties and avoids administrative sanctions from the corresponding municipality.

4. Viceministry of Defense of User and Consumer Rights

The Viceministry of Defense of User and Consumer Rights currently plays a crucial role in the real estate sector, especially for its role in issuing the Certificate of Registration of Projects and Contracts Free of Abusive Clauses. This certificate ensures that the contracts designed by real estate developers respect consumers' rights, thus avoiding the inclusion of conditions that may be considered unfair or unbalanced. Therefore, it is essential to have specialized legal advice that allows designing contracts that protect their commercial interests without violating users' rights.

Additionally, the Viceministry also offers a conciliation mechanism in cases of disputes over alleged violations of consumer rights, becoming a fundamental conciliation instance for resolving conflicts. However, in situations where consumer rights violations are identified, the Viceministry has the authority to impose administrative sanctions that aim not only to punish violations but also to promote fair and transparent commercial practices in the real estate sector. For this reason, it is important to build trust with consumers to ensure sustainable real estate development that respects the rights of all parties involved.

5. Conclusions

The real estate business sector is a competitive and regulated environment with numerous and varied challenges, ranging from managing contractual relationships to complying with technical and legal regulations. As observed in this article, beyond the mere execution of projects, real estate developers face complexities that require not only technical skills but also strong negotiation and legal protection capabilities.

Throughout this document, it became evident that having specialized legal advice is not just an option but an imperative need for drafting contracts that safeguard the developer's interests while complying with current regulations and respecting the rights of all parties involved. Additionally, a proactive approach to managing relationships with suppliers, clients, and authorities can prevent litigation and mitigate risks, thus ensuring the viability and success of the project.

Consequently, it is recommended to implement preventive practices that help mitigate the risks associated with real estate project development to avoid unnecessary expenses that could significantly impact the company's assets. Adopting a proactive risk management approach not only protects financial resources but also contributes to the long-term stability and sustainability of the business.

Víctor Manuel Vásquez Alfaro
Litigation and Corporate Lawyer