Residential development – what are the options?
Britain remains with a shortage of housing, which will not change for the foreseeable future. The economics of supply and demand mean that for those in possession of land suitable for house building, now is as good a time as any to sell for development. For developers maintaining a steady supply of land for future development, it will be as key now as it has ever been. How best to secure the interests of both parties is an important piece of the jigsaw – an outline and merits of the most common instruments are discussed below.
An option agreement is an agreement between a landowner and a potential purchaser for the purchase of the land at a specified point in the future. The option will be for an agreed number of years and will specify the maximum period the parties are tied in. The purchase will be able to serve notice requiring the landowner to sell the land and at that point the landowner will have an obligation to sell the land.
Often, option agreements are structured to give the purchaser (a developer say) an opportunity to get planning permission on the land before exercising the option, and to enable the purchaser to benefit from a higher land value as a result without spending money in obtaining the planning permission. The agreement will specify the mechanics of calculating the land value, which will take into account the increased value due to planning permission and is often subject to minimum land price requirements.
Option agreements have advantages for both parties. Many option agreements provide for an option fee to be paid to the landowner at the time entering into the contract, who will still be able to maintain control over the land up to the point the option is exercised. Whilst there is no certainty that the option will be exercised, the landowner will still have the benefit of any planning permission obtained.
From the developer's perspective, they provide security over land which is likely to be of commercial and strategic importance without obliging the developer to buy the land if there is a downturn in the market.
A conditional contract operates in much the same way as an option agreement, save that upon grant of a satisfactory planning permission (or other trigger event), both parties will have a contractual obligation to proceed with the sale and purchase of the land. In the context of development land, they are frequently conditional on the purchaser obtaining a planning permission. They will contain mechanisms for the calculation of land value, along with definition of what a 'satisfactory' planning permission would be.
Conditional contracts give landowners greater certainty that the sale will go ahead but there is no iron cast guarantee that this will happen as the conditions may not be met. They are more commonly used if the land already has an outline planning permission (and the contract becomes conditional on reserved matters approval) or the land is clearly designated for the proposed development use and can be brought forward quite quickly. A conditional contract is unlikely to give the landowner any cash up front.
Promotion agreements are used where a party with expertise in planning matters enters into an agreement with a landowner to promote land for development and then obtain a planning permission. Once the planning permission is obtained the land is then marketed and sold to a third party.
The landowner has to share the monies received for the land with the promoter but benefits from the promoter's skills in obtaining the planning permission. In addition it is the promoter who risks their money in promoting the land and applying for planning permission.
In a pure promotion agreement the landowner and the promoter are aligned in wanting to get the most money possible on the sale of the land and this means that the landowner can be comfortable that they will obtain the best price possible on the sale of the land.
Many promotion agreements, however, provide for the purchase of the land by the promoter either immediately following the obtaining of planning permission (more like an option) or in the event that a suitable purchaser is not found. When this is the case it is critical from the landowner's perspective to ensure that the agreement ensures that the landowner still obtains the best price for the land.
From the promoter's view point, it is critical to ensure that the landowner does not simply go and sell the land without reference to the promoter.
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The right way forward
In the market we are seeing option agreements, conditional contracts and promotion agreements (both pure promotion agreements and promotion/option agreements). The best method of selling or acquiring land will very much depend on the circumstances of any individual case.
From a landowner's point of view, the clear objective is to achieve the best price possible for the land. However, this will need to be offset by the timescales involved and how quickly any sale can be achieved. On the other side of the coin, purchasers (whether developers or promoters) are concerned with balancing securing the right to buy the land with ensuring that they do not buy at the wrong price if the market moves.
In the post-Brexit economic and political climate, uncertainty is the order of the day and landowners, developers and promoters are all understandably more cautious. This is driving more flexibility in the agreements, whichever route they follow.
Michelmores regularly act for both land owners and developers on a range of residential developments. For more information or if you would like to discuss the sale or acquisition of land, please contact Emma Honey, Head of Real Estate on firstname.lastname@example.org or 01392 687563