Crossing the tracks – developing in the railway environment

Development within the railway environment is seen by many as being a specialism. Yet it is not unusual for sites to adjoin stations, tracks or other railway infrastructure that will necessitate engagement with Network Rail or another transport operator. Other projects will involve works to deliver transport upgrades that either enhance the scheme or are conditions of planning obligations that seek to mitigate its impact. Developers in these circumstances will be confronted with processes and documents that have the potential to delay – or even derail – their projects if they are not handled correctly. The following is a brief overview of those, and of some of the issues that may be encountered, but legal advice should always be sought. Phraseology It is worth alighting on a little Network Rail phraseology and the associated concepts before we depart on this journey. Third-party works are those that physically change or affect the operation of the railway. Examples would be a new station or station asset. Outside-party works, on the other hand, interface with the railway but do not physically change the operation of the railway. These might include works to a railway boundary or other works in proximity to the railway that potentially affect it. Standards are documents produced by Network Rail or the Rail Safety and Standards Board governing the materials to be used and the manner in which works are designed and carried out. They are technical documents, and it is essential that the design and construction team are familiar with them. PACE stands for Project Acceleration in a Controlled Environment and is Network Rail’s pathway for delivering projects within the railway environment. Its phases encompass project initiation, development and selection, design, delivery and close. Possession describes where train services are suspended or controlled during normal operating hours in order to allow access to tracks or other parts of the railway. This is something that must be booked in advance by Network Rail in consultation with train operators, to whom compensation may be payable at the developer’s cost. Regulated change involves procedures for consulting with, and securing the approval of, train operators and other bodies regarding changes to stations, depots or the railway network. The affected consultees will usually be entitled to some or all of their costs and to compensation for their losses and increased expenditure resulting from the changes, which will be borne by the developer. The standards and PACE regimes are engineering and safety-driven processes. The possession and regulated change procedures, in contrast, are by-products of rail privatisation. The processes will differ depending on whether works are third-party works or outside-party works and whether they are procured by the developer or Network Rail. This article focuses on the procurement of works by the developer as, in many cases, they will be integral to a development such that a greater degree of control over their delivery is required. There are additional matters to consider where Network Rail is disposing of land, though those are beyond the scope of this article. Paperwork We will look at the basic asset protection agreements and the longer-form asset protection agreement, which provide for the delivery of works by the developer, though it should be noted that various Network Rail template agreements may be appropriate where it is carrying out works or services on behalf of the developer. The basic asset protection agreements are intended for relatively minor/lower-risk works within or in proximity to the railway, or for the early stages of a project, so they simplify or omit certain mechanisms. Otherwise, they and the longer-form asset protection agreement share a number of features including: Compliance with standards Programming of works Approval of the construction phase plan and method statements Avoiding damage or adverse impacts on the railway Minimum insurances Provision of security Access to Network Rail’s land and booking of possessions Services to be performed by Network Rail and the estimated cost of those Additional operational and maintenance costs Suspension of works for safety reasons Capping of Network Rail’s liability Outside-party works may also be subject to ongoing inspection and maintenance obligations, whereas the following will be applicable to third-party works: Network Rail’s service level obligations Relevant regulated change procedures Approval of contractors, principal designers and the form of building contract Provision of warranties Adherence to the PACE pathway Design development and variations Vesting of the works in Network Rail Construction completion, making good on defects and taking into use Liquidated damages for delays caused by Network Rail’s default Compensation for direct costs arising due to railway-specific risks Pitfalls Issues will be project-specific, but some frequently encountered pitfalls include: Security package – The agreements envisage this in addition to insurances, and it may include an on-demand bond to ensure Network Rail has immediate access to funds. In the case of major or higher-risk works, a developer must also demonstrate it has a substantial balance sheet and/or procure a guarantee from an entity which does. This can prove a significant bar for developers and should be considered at an early stage. Standards and derogations – These can have a considerable impact on the cost of third party works in particular. Network Rail does, however, have discretion to permit derogations from its own standards, which should be explored as part of the design development. Regulated change – These procedures can be protracted and costly and may result in objections from consultees, thereby preventing third-party works or necessitating changes to their design. It is therefore prudent to engage with consultees at an early juncture and avoid committing unconditionally to the development until the procedures are concluded. A cap on the costs and compensation payable to consultees should also be agreed with Network Rail where possible. Completion and taking into use – Third-party works will not be completed (for the purposes of the agreements) until Network Rail has issued a certificate to that effect, and the developer must then maintain them until they are taken into use by Network Rail. The developer should replicate those mechanisms in the building contract to supplement the usual arrangements relating to practical completion. This can be a sensitive issue in the negotiation of the building contract. Delays – The potential for delays caused by Network Rail’s default is a risk that has been exacerbated by the recent industrial action. While the agreements anticipate that liquidated damages may be payable by Network Rail where a particular milestone for third-party works is not achieved, those would not normally be commensurate with the developer’s liability for delays and, in any event, will be capped as below. This can be a difficult area and building contractors will understandably be reluctant to take on the risk. Limits on liability – Network Rail’s liability under the agreements is capped on the basis it is not funded to assume liabilities in respect of third-party projects. The caps are agreed between Network Rail and its regulator, but the capped amounts are often insignificant compared to the developer’s potential losses. This can likewise prove problematic as the developer will not normally be able to cap its liability to third parties. Additional costs of operation and maintenance – The base case is that the developer will be responsible for these where they have not been accounted for in Network Rail’s funding settlement. Though there might be scope for negotiation depending on the importance of the project from Network Rail’s perspective and a capped contribution may be agreed. In practice, developers will try to sub-contract most obligations to the design and construction team, but care should be taken to ensure they are suitably experienced and of good financial standing. It is also important to mind the gaps where developers will nevertheless bear the risk, some of which have been touched on. Payoff Network Rail is estimated to own more than 100,000 acres of land in the UK, so there are many situations where developers may find themselves dealing with it and tackling some of the issues identified. That may be the result of a conscious decision to undertake works on or over Network Rail’s land, or it could simply be a consequence of having a site near the railway. In either case, it will pay to be forewarned and forearmed to avoid hitting the buffers further down the line. Greg Phillips is a managing associate solicitor specialising in real estate development at Penningtons Manches Cooper Photo © Gaetano/Polizzi Unsplash