Building Legal Solutions
Methods to structure a sale and purchase of development land.
- AuthorPaul Harrison
We often get asked by landowners (and developers) to act on their behalf in connection with the sale of land for development subject to planning permission being granted.
There are various different structures including a joint venture agreement where the parties share the risk. That will be covered in a future blog post.
Where the landowner just wants to dispose of the land and have no further involvement in the development after completion there are three main choices:
1. CONDITIONAL CONTRACT
A contract for the sale of land conditional on the purchaser obtaining a ‘satisfactory planning permission’. If the condition is met before the end date then both seller and buyer are tied in to completing the transaction. This is beneficial to a landowner as it gives certainty that if planning is granted the buyer is required to complete.
The purchase price will either be fixed or subject to an agreement or determination of the market value of the land with planning.
2. OPTION AGREEMENT
An option agreement in its simplest form is where the owner of the land grants the developer a right to purchase during a fixed period of time. In return the landowner would often receive a fee as an incentive to burden the land. Again, the price can be fixed or be at market value with planning but the developer would usually expect the risk taken in applying for planning to be recognised by way of a discount. This would usually be a preferred route for developers as it gives more flexibility. If planning is granted then the buyer has discretion as to if and when they want to complete the land purchase. A prudent landowner would include obligations on the developer to pursue a planning application and for this to be approved before being submitted. You can also require the developer to exercise the option within a limited period following issue of the planning decision notice.
3. PROMOTION AGREEMENT
Under this type of arrangement a landowner would appoint a land promoter to pursue a planning strategy and application under agreed objectives. This is a more collaborative approach. A land promoter could also be a developer but this is often not the case and just a specialist in this field. This may be more appropriate where the site is not currently within the local development plan and is a longer term project. The promoter would pay out all costs at their own risk but would then be reimbursed once the land is sold subject to any costs cap agreed.
Should the promoter be successful in securing planning permission the parties will then look to agree a strategy for disposal of the land in the open market. The promoter would then be entitled to receive a share of the receipts and the landowner the balance after deduction of costs.
If a landowner wants to keep an element of control in the planning process then a promotion agreement can be better than a simple developer friendly option agreement.
With any of the above structures where the sale price is based on market value the owner should look to agree a minimum land value or minimum net receipt. This protects against being forced to sell where the planning permission obtained does not meet expectations.
OBTAIN SPECIALIST ADVICE
This blog only gives a very general overview and touches on some of the main points of interest for landowners (and developers) when deciding how best to structure any land sale subject to planning permission for development. There are multiple variables that need to be factored into what can become quite complex documents. Overage can also come into play but I shall leave that for another time.
Feldon Dunsmore is a specialist property firm of solicitors and we deal with these documents almost every day so can give both landowners and developers the benefit of our expertise in this area of law and commercial understanding of both residential and commercial development projects.
There is no correct answer as to which route is best and much will depend on the individual circumstances and negotiating position of each party.
The best agreement will always be one that is drafted in a way that sets out the intentions of the parties clearly. This is why you need a good lawyer whichever side of the transaction you sit on. We also work closely with surveyors and land agents to ensure a joined up approach to negotiating the documents.
If you would like to discuss the sale and/or purchase of land for development, please contact me or another member of the Feldon Dunsmore team on 01926 954694 and we would be very happy to advise.