Back to the future? Five key legal considerations for developers when dealing with industrial sites
By Nick Sparks• 16 November 2017 • 6 min read
We outline the complexities involved with acquiring and developing or selling industrial sites adjoining residential sites
As Melbourne continues to grow with increasing density, the complexities surrounding the interface of industrial precincts with adjoining residential development sites also continue to grow. That issue was put into real context following the recent Property Council of Australia site tour of the Port of Melbourne, which Maddocks sponsored.
The development of the Fishermans Bend precinct and the interface with Australia’s busiest port will be interesting to see roll out, and is even more topical following the release of the draft Fishermans Bend framework plan.
We have seen complex interface issues arise when working on a number of development projects recently, particularly in the city fringe, the western and south-east markets, and developers have responded in many different ways.
Some have sold sites to residential developers and cashed in, as in the case of Altona Precinct 15. Others have repositioned parts of an existing industrial development to include different products such as home offices to interface with nearby residential (see AVID’s Duo product at Evans Park). Others have reconfigured industrial sites to produce smaller lots and take advantage of increased owner-occupier demand and increasing land values in certain segments of the market.
The supply of new appropriately located, zoned and serviced land for industrial development will continue to become constrained in the short to medium term. That means the complexities involved with repositioning existing sites, acquiring and developing older industrial sites or selling industrial sites that are close to non-industrial use will continue.
Here are the key legal considerations we have seen in working on these types of projects.
1. Planning opportunities and constraints
The meaning of industrial use is evolving. Given the changing nature of many industrial uses from traditional heavy manufacturing to lower impact uses, such as biotechnology, data processing and storage and dark supermarkets, it can be challenging to identify where proposed uses sit in the applicable planning scheme.
There are a number of potential zones that might apply to an industrial site, from Industrial 1 to Commercial 1 to Mixed Use and anything in between. Developers also have to grapple with antiquated car parking requirements designed for traditional heavy manufacturing. Careful consideration is needed to identify if the proposed new use of the site falls within the existing planning scheme, or is a planning scheme amendment required. It is also important to consider what legacy constraints sit in any prior permit conditions.
Progress often comes down to Council interpretation and appetite. It is important to put together a quality team of experts to present a clear case for any use. Our planning team works closely with our clients and planning consultants, assisting them to identify planning opportunities and constraints.
2. Section 173 Agreements
Section 173 agreements that were entered into many years ago may burden the site with legacy obligations that may have been relatively innocuous at the time.
For example, there may be obligations to construct or contribute to roads, utilities or other infrastructure. Have those obligations been discharged? Will they need to be modified for any new scheme?
The subject of infrastructure charges, particularly Development Contribution Plan payments, is particularly important to understand in any section 173 agreement that deals with this issue. What charges have been paid and what liabilities remain? This can be harder to identify than would be expected, given the differing standards of record keeping for sites.
The subject of development contributions and infrastructure charges is a worthy discussion topic in itself, given the complexity we now see in advising on DCPs, GAIC and other such infrastructure charges.
Environmental practice and remediation standards and regulations evolve year by year. What may have been suitable 10 years ago may not be appropriate now.
Conditions in any statutory environmental audits are becoming more detailed. It is important to understand any legacy conditions from previous environmental audits, and equally important to understand and manage new conditions imposed in any new audit.
Many Councils now require more detailed section 173 agreements imposing environmental obligations, for example in respect of maintenance and monitoring of contamination. It is important to negotiate an appropriate regime in any new 173 agreement that will not overly burden future use and sales, and to understand any legacy obligations and liabilities in existing section 173 agreements.
If purchasing a new site, whether previously brownfield or not, environmental due diligence is critical, along with a clear risk allocation in the contract for any remediation that may be agreed with the former owner. If any remedial obligation is to remain with the former owner, such a regime may go as far as retention of funds at settlement for a defined period to secure against any continuing vendor obligations.
Many industrial sites may be burdened with covenants. It is important to review and understand those covenants and obtain a clear understanding of the restrictions on use.
Some covenants may be subject to sunset dates when the covenant and corresponding restriction will fall away. Some may not, and may burden the title in perpetuity.
As precincts evolve, and the types of industrial uses evolve, there may be scope to either modify or remove any covenants which are no longer relevant or desirable. Whilst not an easy process, it can be undertaken in a number of ways, most typically by agreement with the party benefitted by the covenant (although this may be hard if that land has been subdivided), or by a planning permit process through Council.
5. Construction and Site Conditions
When considering redeveloping an industrial site, it is important to fully investigate whether it is feasible to construct the project on the current or proposed site. If building any new product for a tenant or occupier, site conditions are always important. That is particularly relevant for new types of warehousing requirements such as high bay warehousing, and the requirements for increasingly complex tenant fitouts.
If the proposed redevelopment is feasible, the risk allocation in the construction contract between the developer, builder and future occupier in terms of any design and any fit out needs to be clear. It is also important that any requirements from an agreement for lease that have been negotiated with a proposed tenant are passed through clearly to the builder in the construction contract.
In summary, any interface between differing land uses, such as industrial and residential, is complex. When going back to the future to reposition existing developments, acquire and develop older industrial sites or sell industrial sites there is an extra layer of legal issues to consider. Those issues can be managed, but should not be glossed over and ignored. The right strategy will ensure you successfully deliver your project.
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