The government are constantly introducing new plans to fix the broken housing market and build more homes across England. At the same time, the current planning-led system is evolving and that has led to an increase in landowners being approached by developers.
As commercial property solicitors in Essex and Suffolk, we are advising an increasing number of landowners across Essex and Suffolk who are considering promotion of their land through the planning system or looking to enter into agreements with a third party to turn the land into development land.
So should a landowner enter into an Option Agreement, or perhaps a Promotion Agreement at least to secure the planning permission which is required, or maybe enter into an arrangement joining up two or more neighbouring landowners and working together to achieve a sale?
One agreement often proposed is an Option Agreement. By entering into an Option Agreement, a landowner gives the developer a right to buy it at a specified point in the future, for example, when planning permission has been granted. The price payable for the land by the developer is based on the value of the land once planning permission has been obtained. A landowner must bear in mind that in this circumstance, if the conditions for exercising the option are satisfied, a developer can compel the landowner to sell at the value of the land calculated in accordance with the Option Agreement.
Option Agreements have advantages for both parties. From a landowner’s point of view, there is usually an option payment made when the agreement is entered into so fairly on in the process whilst the developer secures land which is usually of strategic importance a latter price which is often discounted against full market value. The discount is to take account of the time and effort a developer puts into getting the planning consent and for giving the long term commitment.
Alternatively, a landowner could enter into a Conditional Sale Contract. The contract usually contains a number of conditions, but that most commonly used is when planning permission acceptable to the developer is granted, at which point completion of the sale takes place. If the conditions are not satisfied or waived by the developer then the contract is likely to terminate and it could result in the land not being sold at all. Whilst a landowner is then able to try again at a later date to sell the land, the window of opportunity for pursuing the development under any planning system may have expired and the opportunity could be lost.
Land Promotion Agreements are becoming an increasingly common alternative and may well present a more viable agreement. In this instance, the developer does not buy the land but rather in conjunction with the landowner seeks the planning consent for development and then offers the land for sale on the open market. The ultimate aim of this type of set up is to find one or more buyers who will build out the development once planning consent has been secured.
The terms of a Land Promotion Agreement are always negotiated but in most instances the developer is required to use its own funds and expertise to promote the property within the local development framework and secure a planning permission which maximises the value of the land. When the land is eventually sold, proceeds are divided between the developer and the landowner in agreed proportions. This provides the landowner and the promoter with some certainty and also a clear incentive to work harder to maximise the value of the land. This is, of course, in contrast to an Option Agreement where the landowner will be striving for the highest possible land price whereas the developer will be keen to keep the land price down. A slight variation on a Land Promotion Agreement is referred to as a Collaboration Agreement…
Collaboration Agreements are used in situations where more than one landowner is brought together. Sometimes, a particular development scheme will only be viable if adjoining landowners work together. For example, one landowner may have a very large parcel of land suitable for development but may need another landowner to join the scheme as they have the access to the site.
If landowners are considering entering into any of the above agreements, it is important to bear in mind the key for the landowner is usually to maximise the value of the land. The other point to consider when looking at which agreement may be more suitable, is how soon the landowner wishes to see a return. Most Option Agreements attract an Option Fee payable up front whereas under a Promotion Agreement the landowner may have to wait until a sale is secured before receiving any money.
However, Option Agreements, Conditional Contracts and Promotion Agreements are not mutually exclusive and the most appropriate form of any agreement usually combines various elements from the three agreements.
It is important that landowners seek advice at an early stage and from a solicitor with experience in agreements dealing with land and development. It is right that you discuss with a solicitor all of the alternatives and the implications of these before proceeding down the route of one particular type of agreement, as there could be another type of agreement which is more suited to the landowner’s long term plans and wishes.
Holmes & Hills Solicitors advise and represent landowners across Essex and Suffolk, advising them on a wide range of matters concerning dealings with developers. For advice, call my colleague, Philippa Jerram on 01376 320456.