When strategic partnerships go wrong

Strategic partnerships between local authorities, registered providers, residential developers and funders have become a well-established model for delivering housing at scale.

They allow public and private sector organisations to combine land, expertise and funding to bring forward complex regeneration and development schemes that any one party might struggle to deliver on their own.

The longevity of these arrangements - many operate over development periods of up to 15 years - is both their greatest strength and their greatest weakness.

Strategic partnerships must navigate economic and political cycles, fluctuating construction costs and changing housing demands. Well-structured partnerships are designed to accommodate these pressures, with flexibility and robust governance built into shared objectives.

Nevertheless, relationships can become strained, performance may deteriorate or partners experience financial stress. For local authorities, and indeed all parties, understanding how those risks are managed before entering into a strategic partnership is just as important as understanding the opportunities they create.

Building resilience

The most effective strategic partnerships are designed on the assumption that circumstances will change. Whilst contractual certainty is important, agreements that are too rigid can become vulnerable when market conditions dramatically change.

That is why many long-term partnerships contain mechanisms that allow the parties to respond to changing circumstances whilst preserving the overall objectives of the scheme. Partnership and project boards, together with operational working groups, can provide a way to identify and address emerging issues before they become more significant problems.

This flexibility is not designed to allow parties to walk away from commitments whenever challenges arise. Rather, it creates a framework where issues can be managed collaboratively and delivery continue.

Financial due diligence and risk assessment

A local authority’s first line of defence is often in the scrutiny that takes place before any development partners are appointed.

Local authorities will typically undertake extensive financial due diligence to assess the overall financial health and resilience of prospective partners. This commonly includes reviewing three years of audited accounts, assessing profitability, liquidity and solvency, and undertaking independent credit checks.

Financial viability assessments are used to examine key metrics such as debt-to-equity ratios, turnover and profit margins, with local authorities looking to understand not only the current financial position of a developer but also its ability to withstand future market shocks.

Attention is also given to the financial structure of the proposed development itself. Authorities will want to understand whether projects are being funded through debt, equity or existing reserves and how those arrangements may affect delivery should market conditions deteriorate.

Stress testing has become increasingly common. Authorities may model a range of adverse scenarios, including declining sales values, construction cost inflation or increased borrowing costs to assess how a scheme would perform under pressure.

Consideration is also given to the covenant strength of any parent company and the beneficial ownership of the development partner. This allows authorities to identify potential reputational risks, governance concerns or other issues that could affect the long-term success of the partnership.

When market conditions deteriorate

Even the strongest partnerships can face challenges when market conditions change, with many strategic partnership agreements including provisions that deal specifically with market downturns. Rather than immediately triggering default provisions, these arrangements typically require the parties to work together to develop mitigation strategies and recovery plans. The objective is to preserve delivery wherever possible.

This may involve a review of programme phasing, reconsidering tenure mixes, adjusting delivery timetables or exploring alternative funding arrangements. The emphasis is generally on collaboration and problem-solving rather than enforcement.

Where concerns arise around a developer’s ability to meet its obligations, local authorities should look to the financial protections that were negotiated at the outset. Performance bonds will be one example.

These are commonly provided by third-party sureties and offer financial compensation if a developer fails to fulfil specified contractual obligations. Whilst the value of a performance bond is often limited to a percentage of the contract value, commonly around 10%, it provides a degree of protection and reassurance. Importantly, the bond provider’s willingness to underwrite the obligation can also be viewed as an independent validation of the developer’s financial standing.

Holding company guarantees provide another form of protection. These guarantees are often broader in scope and may cover the full value of the contractual obligations rather than a limited percentage. However, they are only as strong as the financial position of the wider corporate group. If the parent company itself experiences financial distress, the practical value of the guarantee may be significantly reduced.

Resolving disputes without disrupting delivery

Disagreements are not uncommon in long-term partnerships. The issue is how those disagreements are managed.

Most strategic partnership agreements are structured in a way that encourages disputes to be resolved at the earliest possible opportunity, typically through the partnership board or project-level forum to avoid formal proceedings and costly proceedings. If a resolution cannot be reached, matters may then be escalated to senior executives within each organisation.

Only where these processes fail will formal dispute resolution mechanisms usually be engaged.

Depending on the nature of the issue, this may involve mediation, expert determination or adjudication. Litigation is generally regarded as a last resort. Protracted legal disputes will increase costs, delay housing delivery and damage relationships. Most partnership agreements are designed, therefore, to encourage resolution whilst allowing projects to continue progressing wherever possible.

Step-in rights and intervention

Where performance concerns become more serious, local authorities may turn to contractual step-in rights that may be available to them.

Step-in rights allow, at least in theory, an authority to intervene directly where a development partner is failing to perform. In practice, however, authorities are often reluctant to exercise such powers.

Stepping into a complex development project can expose an authority to significant financial, operational and legal risks. Few authorities have the resources or appetite to assume the role of developer themselves.

Consequently, the preferred approach is often enhanced monitoring, remediation plans or improvement programmes designed to restore performance.

Where intervention does become necessary, a more practical solution might be for the authority to use its contractual rights to appoint an alternative specialist organisation to assume responsibility for delivery.

For this approach to work effectively, authorities must ensure they have access to the information, documentation and intellectual property required to continue the project. Without appropriate rights to designs, technical information and project data, transferring delivery to an alternative provider can be significantly more challenging.

Exit and termination

Despite the best efforts of all parties, there will be times where continuation of the partnership is no longer viable. Here, the termination provisions set out in partnership agreements will determine what happens next.

One of the key questions is whether a default affects the entire partnership or only a particular phase or site. For large, multi-site arrangements, authorities will often seek to avoid a situation where difficulties on one development automatically jeopardise the wider programme.

Cross-default provisions require particularly careful consideration. Parties may agree that failure across a specified proportion of sites triggers wider termination rights. Determining where that threshold should sit requires a careful balancing of risk and commercial reality.

Where land has already been transferred or sites have been drawn down, arrangements may be required to facilitate the surrender of interests, transfer of assets or appointment of replacement delivery partners whilst, all of the time, working to minimise disruption and preserve housing delivering.

Planning for the unexpected

Strategic partnerships are by design intended to endure. Their purpose is to provide a framework through which local authorities and development partners can deliver homes and regeneration over long periods of time.

Their longevity is built on robust governance, rigorous financial due diligence, effective contractual protections and dispute resolution procedures. The role is to protect the interests of all partners and the partnership itself. It is where specialist lawyers create value by providing the mechanisms to avoid the need for formal legal proceedings.

Shazia Bashir is a Partner in the Social Housing team at Winckworth Sherwood.