5 Red Flags Hiding in a Co-Development Contract

Most co-development deals that go sideways do not go sideways because of the market, the trades, or the permit process. They go sideways because of clauses the homeowner signed without understanding. Here are the five most common red flags I see in Vancouver co-development contracts, and the specific language you need to push back on.

TL;DR

1. Unit selection “to be determined at builder’s discretion” — remove this clause or walk away.
2. “Performance bond” that is actually a personal guarantee from a numbered company — not the same thing.
3. Force majeure drafted so broadly it excuses routine construction problems.
4. Waterfall language that pays the builder’s “developer fee” before return of homeowner capital.
5. Priority of registration at LTSA that places the construction lender ahead of your land interest without a proper priority agreement.

Red Flag #1: Vague Unit Selection

The worst contract clause I’ve ever read said: “Homeowner shall receive two (2) residential units in the completed development, such units to be selected by the Builder at final strata registration, giving due consideration to Homeowner’s preferences.”

That is a “builder picks, homeowner hopes” clause. It is not a selection clause.

What you want instead: Unit selection specified by proposed strata lot number, referenced to a preliminary strata plan attached as a schedule. Minimum square footage, floor level, orientation, and finish specification all defined. Penalty clauses if the delivered unit deviates more than a small tolerance from the spec.

Sample language to insist on: “Homeowner shall receive Proposed Strata Lot 1 (ground floor, 1,215 sq ft, southeast exposure, finish schedule ‘B’ attached) and Proposed Strata Lot 4 (top floor, 1,180 sq ft, corner unit, finish schedule ‘A’ attached).”

Specific. Numbered. Measurable. Anything less is a builder option dressed up as a homeowner right.

Red Flag #2: Fake Performance Bonds

A real performance bond is issued by a surety company (Travelers, Zurich, Intact, and similar) and guarantees completion of the work to a defined standard, with the surety on the hook for a specified dollar amount.

A fake performance bond is:

• A personal guarantee from the builder’s principal
• A guarantee from a holding company with no disclosed financials
• A letter from the builder’s bank saying they have a line of credit
• An unsecured promise

I have seen all four called “performance bonds” in Vancouver co-development agreements. None of them are.

What you want instead: A Labour and Material Payment Bond and a Performance Bond, both from a surety licensed in British Columbia. Bond amounts must equal at least 50% of the contract value. You want to receive copies of the bond documents before breaking ground, not “when they’re ready”.

Verify: Google the surety company and check they’re regulated. A real surety will have a rating from AM Best or equivalent. If the “bond” comes from a numbered company, it is not a bond.

Red Flag #3: Broad Force Majeure

Standard force majeure clauses excuse performance for: acts of God, war, natural disasters, pandemics, government orders. That’s reasonable.

Bad force majeure clauses I’ve seen excuse:

• “Unforeseeable supply chain disruptions” (code for: normal supply chain)
• “Labour market conditions” (code for: can’t find trades, not our fault)
• “Adverse weather” (in Vancouver, where rain is 6 months a year)
• “Regulatory delays” (code for: we filed the permit late)
• “Market conditions” (code for: we don’t feel like building right now)

Every one of those is a normal construction problem, not a force majeure event. If your contract excuses the builder from those, you have no contract.

What you want instead: Narrow force majeure that covers only truly exceptional events. Anything else the builder wants excused must be in a separate “permitted delays” section with defined time limits and cure periods.

Red Flag #4: Waterfall Payment Priority

In an equity JV, the profit distribution waterfall is where retail homeowners get cooked. A clean waterfall goes:

1. Return of construction loan principal and interest
2. Return of homeowner land capital ($1.8M in our example)
3. Return of builder cash equity contribution
4. Preferred return to both parties (8-12% annually)
5. Developer fee to builder (capped, disclosed)
6. Split of residual profit per agreed ratio

A bad waterfall I saw once went:

1. Return of construction loan
2. Developer fee to builder (10% of gross project cost)
3. Return of builder equity
4. Preferred return to builder only
5. Return of homeowner land
6. Split of residual

That homeowner signed away $400K of their capital position by agreeing the developer fee came before return of land. They didn’t understand that clause. Their lawyer didn’t flag it.

What you want instead: Read the waterfall aloud, in numbers, at two different sale price scenarios. If you can’t follow who gets paid when, you can’t sign it.

Red Flag #5: Registration Priority at LTSA

This is the most technical red flag and the most common.

Here’s what happens: You transfer your land to the SPV. The SPV borrows from a construction lender. The construction lender registers a mortgage on title. Your interest in the SPV is unregistered, or registered as a caveat junior to the mortgage.

If the project fails: the lender gets the lot. You get nothing.

What you want instead: Either (a) keep title in your name and grant the builder a registered option with priority over any future charges, or (b) transfer to an SPV where your interest is registered as a priority charge ahead of the construction lender, with a priority agreement signed by the lender.

This requires a lawyer who actually understands real estate and development finance. A notary will not catch this. A general-practice lawyer will often not catch this. You need someone who has structured co-development agreements before.

What To Do If You See Any of These

1. Stop signing until the clause is fixed.
2. Get independent legal review (not the builder’s lawyer, not a notary, not your cousin).
3. Walk away if the builder refuses to revise the language.
4. Remember: a builder who refuses to fix a red flag at the term sheet stage will not fix it later.

The One-Sentence Rule

If any clause in the contract makes you say “I’ll just trust them on that one”, remove the clause. A co-development is a partnership, but it is also a legal document. Trust is not a substitute for clear language.

Further Reading

• See the full Choosing a Builder Partner guide for vetting criteria
• Start with the Co-Development Hub for the broader framework
• For context on Vancouver-specific construction risks, see our peat bog foundation costs analysis

Your lawyer earns their fee on the contract, not on the handshake. Pay for the review. Every time.