In an earlier article we outlined the key features of various deal structures that may be used when selling land with development potential. In this article we focus on options, promotion agreements and hybrid agreements and outline some pros and cons of each from a landowner perspective.
An option agreement offers the landowner a relatively straightforward arrangement with a developer who will promote the land, buy it (if the price can be agreed) and develop it.
A positive for the landowner is that they will be contracting with the likely end user of the land and so can forge a relationship with that party. A developer may offer favourable terms if it wants to build out the site. In addition, the developer will generally be procuring a planning permission for itself and so the risk inherent in a promotion agreement, of the planning permission falling short of a developer’s requirements, is removed.
Risks to consider are:
Many landowners will veer towards a promotion agreement, because of the attraction of exposing the site to the open market and testing its value once planning permission has been granted, rather than the prospect of a battle on price with a developer under an option.
Key points to think about are:
Hybrid agreements seek to offer the best of both worlds in relation to sites which can be sold in phases. Typically, they take the form of an option, where one or more of the early phases is required to be put to the open market and sold to a third party, so as to establish a benchmark for the value of later phases to be sold to the developer under the option. Sometimes the developer has a right of first refusal in relation to the market phase.
These agreements can be tricky and it is worth looking at:
As referred to above, if the site is to be split into separate phases for development, then it is sensible that the planning permissions are also phased- so as to bind to each separate development site. While this may require several applications for planning permission, the benefits include easy identification of the land being bound by those permissions. The further benefit of using separate planning permissions for each development is that each developer can ensure they meet their own obligations. If the separate developments are covered by the same permission, then developer A may have to work with developer B to fulfil the obligations for the land as a whole which would add unnecessary complication (and cost) to each party’s development.
In addition to the above, caution should also be taken regarding overlapping planning permissions in line with a recent decision of the Supreme Court in Hillside Parks Ltd v Snowdonia National Park Authority . This endorsed the ‘Pilkington Principle’ which provides that, whilst it is possible for a landowner to make multiple planning applications over the same land, if development under one planning permission renders implementation of any other planning permission for that land physically impossible then the earlier permission may no longer be valid.
Ultimately, finding the structure which is the best fit will depend on the circumstances and terms offered. Landowners are well advised to consult an agent and solicitor with experience in this complex area in order to identify the best way forward.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.