What are the issues and how can I ensure the ransom strip remains valuable?

This article is one in a series looking at methods of structuring strategic land transactions. Further and more detailed information about other elements of strategic land can be found on our strategic land page.

A common feature when selling development land is retention of a strip of land along any boundaries with adjoining third party land that could have future development potential but would likely need to run access or services across the ransom land. Structured properly, any third party looking to develop the adjoining land will need to pay to cross the ransom. This article considers the issues arising when negotiating retention of ransom land and/or its release and how to maintain its value.

1. What does a ransom strip look like?

Ransom strips are usually defined as a strip of land ranging between 0.3m to 0.5m wide specified to lie between certain points shown on a plan. They sometimes physically exist on the ground and are demarcated from the main title by a fence or other structure, however, more commonly they exist only on paper. Ransoms are often at risk of being lost through adverse possession by third parties, especially if they do not exist on the ground.

Ransom strips are usually created by being retained when a landowner sells the main site. Where land is sold under a promotion agreement, a ransom strip can be jointly owned by the seller and the promoter thereby giving both parties the right to share in any future value generated by it.

2. Is the ransom ransomed?

Merely retaining ownership of the strip may not be enough to realise full value from a third party who needs to connect through it. When selling the main title, unless the sole reason for the ransom is to prevent the main site purchaser acquiring adjoining land, the landowner should reserve full rights of access and services for the benefit of the ransom land.

It may be appropriate for a developer of the main site to install an access road and services to a connection point with the ransom or alternatively, for the owner to enter the site to do so. The owner may need to carry out later works to upgrade or increase capacity of the same. It may also need the main site owner to procure adoption and/or enter into planning, works or other statutory agreements. Such obligations would ideally be protected by title covenants and possibly a title restriction. Without considering these points, a landowner may find the ransom worthless.

3. How much is the ransom worth?

The advice of an experience surveyor will be required to assess value. The ransom landowner of fully ransomed adjoining land can often expect to receive 30% – 50% of the increase in value. The surveyor will consider the residual calculations, comparable evidence, construction costs and profits. The timing of the valuation will also have an impact. A developer may wish to negotiate value and complete the release of a ransom before obtaining planning permission.

4. How can I protect my ransom land?

Ensure that the ransom strip is properly registered at the Land Registry. If the ransom land is unregistered, attend to voluntary first registration. Set a ‘Property Alert’ on the land at the Land Registry so that you are notified if any third party seeks to register any form of notice against the land.

The purchaser of the main site may need access to the ransom land in order to carry out development works and/or comply with planning conditions. If rights are granted over the land, then these may circumvent the ransom. Rights should be restricted wherever possible, however, if the purchaser insists on access over the ransom, restrict these to the use of the site and specifically state that no rights may be granted for the benefit of any adjoining land. Bear in mind that once services are installed and adopted, they are controlled by the utility company who may allow adjoining landowners to connect.

5. When releasing a ransom, should I transfer the land or simply grant rights over it?

If the ransom land payment has been calculated based on a specific development, consider whether the landowner wishes to share in future increases value if planning on the adjoining scheme is improved or proceeds with a more valuable form of development. Retaining ownership and granting rights over the ransom for the specific development, may allow the landowner to keep control.

6. Should a ransom strip be retained when selling my land?

Whilst a ransom strip may sound an attractive structure to claw back value realised from adjoining land, a landowner should consider overage as an alternative approach. Overage terms protected by title restriction may be easier to protect and enforce than theoretical ransom land that does not exist on the ground.

Further and more detailed information about other elements of strategic land can be found here.

After the last few years of unprecedented change for our clients and contacts, as well as our own business, we felt it was time to create a new blueprint for what we stand for today – and where we are going in the future.

We are pleased to announce the launch of our new strategy and brand. We’ve sharpened our focus and honed our values, to help us to navigate a more positive future for our clients, our communities and our own business.

Destination 2030

At the heart of our new strategy, Destination 2030, is an ambition to develop a more diverse, equitable, and engaged business, with a vision that delivers both profit and purpose.

Tim Richards, Managing Partner at Michelmores said:

“In the times that we live in, of great change and uncertainty, our vision is to guide our clients towards an enduring, sustainable and resilient future. I am genuinely excited about how we will be helping our clients to navigate change and opportunity, and to help them create more sustainable business models for the future.”

Please take a moment to watch our new Firm video and have a look around our website.

As the market for environmental service payments rapidly expands some landlords have seen a potential opportunity to recover possession of land from tenancies protected by the Agricultural Holdings Act 1986 (“the 1986 Act.”)

Many landlords are considering the opportunities that biodiversity net gain (“BNG”) and nutrient neutrality represent, to say nothing of the existing carbon markets. All of these markets involve changes to the use and appearance of land whether that is habitat creation, cessation of farming or the management of woodland. The planting of trees from small copses to large scale afforestation can form part of these plans.

Definition of agriculture

It is therefore worth considering how the 1986 Act deals with the issue of tree planting. The question of purpose is the first consideration as the definition of agriculture states:

““agriculture” includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadow land, osier land, market gardens and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agricultural purposes, and “agricultural” shall be construed accordingly.”

So where new woodland planting is planned for a use which is not ancillary to agricultural use that will result in a change of use of the land. It is suggested that the definition of agriculture was designed to deal with the planting of shelterbelts etc which are ancillary to the primary agricultural use of the land.

Agricultural or non-agricultural use?

The planting of trees for habitat creation purposes would, in my view, be a non-agricultural use and indeed in a nutrient neutrality context would have to be in order to demonstrate the required cessation of agricultural activity. It is possible that agricultural use could continue on lightly afforested land used for habitat creation, perhaps through extensive conservation grazing. In those circumstances there is arguably no change of use and the agricultural label remains firmly affixed. This could be important to the landlord as well as the tenant, as it could assist with the securing of agricultural property relief for inheritance tax purposes.

Whether or not a change of use has occurred is important because of the operation of the 1986 Act.

Planning permission

Although the planting of trees can effect a major change in the landscape, such an operation does not, of itself, require planning permission, although an Environmental Impact Assessment may be required from the Forestry Commission. This is despite the fact that there would be a change of use from agriculture to woodland.

Section 55 Town and Country Planning Act 1990 (“TCPA90”) defines “development” and development requires planning permission. It also identifies what is not development, and includes the following:

“(2) The following operations or uses of land shall not be taken for the purposes of this Act to involve development of the land—

[…]

(e) the use of any land for the purposes of agriculture or forestry (including afforestation) and the use for any of those purposes of any building occupied together with land so used”

The TCPA90 does not include a definition of “forestry” or “afforestation”, but the Forestry Commission guidance on “Environmental Impact Assessments for woodland” (dated 28 September 2021) (“the Guidance”) states:

“Afforestation means conversion of a non-woodland land use, for example agriculture, into woodland or forest (these terms are used interchangeably) by means of planting, or facilitating natural regeneration (self-sowing) of trees to form woodland cover. This can include proposals for short rotation coppice (SRC) and short rotation forestry (SRF), including energy crops and Christmas tree plantations.”

Case B of the 1986 Act

If planning consent is not required, then a landlord will not be able to rely on the provisions of Case B of Schedule 3 of the 1986 Act. It must be remembered that there may be other aspects of a particular project which effect a change of use of the land or require development which may require planning permission.

Where perhaps Case B will come into consideration is where developers re-organise their projects to try and put landlords in a more favourable tactical position. If we consider the example of a redline development area of say 10 acres. Plans may be in existence to cover this with houses but the advent of the Environment Act 2021 (“EA 2021”) and the need for BNG necessitates a change. Now the developer may require a redline area of 20 acres to accommodate the original number of dwellings plus the land required for onsite BNG mitigation.

SUDS

A further point here is the recent decision by the Government to implement Schedule 3 of the Flood and Water Management Act 2010, which makes Sustainable Drainage Systems (“SUDS”) compulsory for all new development. This places a further burden on developers, who will have to acquire bigger sites or build fewer or smaller houses.

This new 20 acre combined development and mitigation site could be the subject of a new planning application, which if granted could found a valid Case B notice to quit. That is a very different proposition to the original 10 acre application with an accompanying purchase of the necessary BNG credits or similar mitigation provided on a separate site some distance from the development.

I can’t see that the extension of the development site to accommodate SUDS or BNG mitigation would invalidate a Case B notice to quit. This is because the BNG mitigation or SUDS within a development redline boundary would clearly be of a non-agricultural nature and would require planning consent as part and parcel of the housing development.

Renegotiation

In light of these developments, we might expect to see renegotiation of existing option and promotion agreements between developers and landowners or tactical discussions prior to the service of a notice to quit. My advice has always been that those tasked with getting planning permission should link up with those in charge of securing vacant possession as early as possible. That advice is even more relevant in the current climate.

Natural capital and section 27

Coming back to natural capital schemes, if a change of use is being effected from agricultural to woodland use then section 27 (3) (f) of the 1986 Act comes into play. That states:

27        Tribunal’s consent to operation of notice to quit.

(1)        Subject to subsection (2) below, the Tribunal shall consent under section 26 above to the operation of a notice to quit an agricultural holding or part of an agricultural holding if, but only if, they are satisfied as to one or more of the matters mentioned in subsection (3) below, being a matter or matters specified by the landlord in his application for their consent.

(2)        Even if they are satisfied as mentioned in subsection (1) above, the Tribunal shall withhold consent under section 26 above to the operation of the notice to quit if in all the circumstances it appears to them that a fair and reasonable landlord would not insist on possession.

(3)        The matters referred to in subsection (1) above are—

(a)        – (e)……

(f)         that the landlord proposes to terminate the tenancy for the purpose of the land’s being used for a use, other than for agriculture, not falling within Case B.

Availing themselves of section 27 (3) (f) a landlord could therefore serve a notice to quit in circumstances where tree planting is proposed. However, there is an important safety net for the tenant; the Tribunal will not give consent to the operation of the notice to quit if they consider that a fair and reasonable landlord would not insist on possession.

Fair and reasonable landlord

On the face of it, it could be argued that a desire to tackle climate change through afforestation is a laudable aim and that a fair and reasonable landlord would insist on possession. However, I am not sure that the average Tribunal would see things through such a macro lens.

The test is meant to be that of the hypothetical landlord and so objective in nature, but the Tribunal is human and inevitably, subjective views will be brought to bear. Every Tribunal will be different and one person’s view of what is reasonable and the importance or otherwise of climate change etc may radically differ from another’s.

Scale & context

Much may depend on scale and whilst consent might be given for possession of part of a holding, the economic and personal impact of losing a whole tenancy may well tip the scales in the tenant’s favour – even in the face of the global emergency of climate change.

Similarly, context will play a part and if a landlord has a well worked up landscape scale recovery plan on the stocks, with one dissenting tenant blocking progress for the wider river catchment community, then that might swing the decision back into the landlord’s camp.

Every case will be different and although we are working in a rapidly changing environment some things remain the same; that fundamental weighing up of the benefit to the landlord, as compared to the detriment suffered by the tenant, will still have to be performed by the Tribunal. Context is everything and early and sound professional advice will be essential.

There are various deal structures that may be used when selling land with development potential. Which structure best suits the transaction may be driven by a number of factors and ultimately comes down to the degree of risk, control and flexibility required by the parties. We provide a summary of the main deal structures below. Each has its merits and landowners may wish to remain flexible to attract a greater level of interest following which terms can be compared.

Option Agreement

The landowner offloads the risk and the developer seeks to secure a satisfactory planning consent for development within a specified period of time, taking on the associated costs. In return, the Developer has the exclusive right to purchase the land once planning is secured either at a pre-agreed fixed price or at a discounted sale price, usually a percentage of open market value between 75%-90% depending on the degree of risk and return. The costs of promoting the land and securing planning are usually deductible from the land value, however, these are often capped at an agreed amount to give the landowner more certainty. An upfront option premium may also be paid by the developer to the landowner.

An option is a binding agreement and, if not exercised by the developer, will come to an end. They are generally preferred by developers to other strategic land sale structures and more common where sites are likely to take longer than two or three years to achieve planning consent. A conflict of interest between the landowner and developer may arise when negotiating the ultimate sale price which is not tested on the open market (unlike a promotion agreement). To protect the landowner’s position a minimum price return and a cap on costs may be included.

Promotion Agreement

The landowner enters into an agreement with a specialist promoter and, similar to an option agreement, the promoter uses reasonable endeavours to obtain planning consent for development at its own risk and cost. The difference from an option is that when consent is secured the land is sold in the open market (rather than to the promoter) and the promoter shares in the net sale proceeds after planning costs have been deducted and reimbursed to the promoter. The promotor typically receives a promotion fee on the sale of 10-25% sale price after deductions.

Promotion agreements are often preferred by landowners as the sale price is market tested and the open market value may be higher in the open market without being restricted by assumptions in calculating market value included in an option which may be disputed. The Promoter will make a profit without having to finance the acquisition or development and its interests remain broadly aligned with the landowner’s interests throughout the process.

Hybrid Agreement

Hybrid agreements offer a blended approach. The landowner grants the developer an option with the ability to elect to sell the land or parts of the land to a third party and share the sale proceeds with the landowner. Similar to a standard option, the Developer may acquire part of the site on securing planning consent for a discount of market value, however, a hybrid agreement may require the remainder of the site to be marketed and sold to the highest open market bidder, akin to a promotion agreement. The sale price for the part that is sold on the open market may then be used as the basis for calculating ‘market value’ in the option element of the agreement. This avoids the price being determined on the basis of an RICS Red Book valuation, which may result in a lower land value as mentioned above.

A hybrid agreement is often most suitable for larger sites where there is sufficient land to be sold in phases. The advantage to the landowner with the hybrid structure is removal of the conflict of interest in agreeing the sale price. A complexity that can arise is over who builds the initial roads and services where the land is being sold in phases.

Conditional Contract

A conditional contract is a binding agreement on pre-agreed terms. Unlike an option or promotion agreement, the terms are identified and agreed at the outset. This usually includes the price, extent of development and the parameters for fulfilling any condition. The parties must proceed with the sale and purchase on these agreed terms once the condition is satisfied and within the stated timescales.

In relation to the sale of land for development, the condition would usually be the buyer obtaining a satisfactory planning permission. The buyer must use reasonable endeavours to procure satisfaction of the condition within the specified timescale. Once satisfied, the contract becomes unconditional and the sale completes. If the condition is not satisfied by the stated date, then the contract will terminate.

A contract conditional on planning is usually more suited to sites which are allocated in the relevant local plan for development, or where there is already outline planning permission and it is agreed that the contract shall be conditional on the grant of a reserved matters consent. They may not be appropriate where there are other uncertainties in addition to planning.

Unconditional Contract with Overage

Another option on selling development land may be to agree an unconditional sale, with or without full planning consent, for an agreed price but retaining the right to receive a further payment should planning/further planning consent be secured or the site be developed more than an agreed threshold. This clawback of future value can be agreed by way of an overage agreement. The additional sum of money payable to the seller landowner may be triggered on achieving planning permission, a change of use, development of an additional area or additional dwellings, or the sale of dwellings at a price which exceeds an agreed threshold.

The benefit of this arrangement for the landowner is the immediate receipt of capital monies, however, the overage payment is entirely contingent on future events outside the control of the landowner and is therefore at risk. The risk associated with the overage payment may be reflected in the commercial terms of the overage that are negotiated.

Best fit

Landowners are often advised that a promotion agreement would be in their best interests and realise the greatest land value, mainly due to the sale price being market tested. A developer may, however, offer very competitive terms for an option agreement where it wants to build out the site. Ultimately which structure is the best fit will depend on the circumstances and terms offered and landowners are well advised to consult an agent and solicitor with experience in this complex area in order to plan early.

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There are two major sets of planning reforms currently being considered, both of which could affect rural landowners in England in various ways, if they are enacted or policy is brought in.

The Levelling Up and Regeneration Bill

The first reform is the Levelling Up and Regeneration Bill, which is in the House of Lords for its second reading.  Its remit goes well beyond just planning, as it aims to advance the Government’s levelling up agenda, by spreading economic opportunity and better living standards across the country, including reducing environmental disparities.

Additional powers are to be given both to new combined county authorities and to local communities, with the aims of bringing about regeneration, including through a planning system which places beauty, democracy, adopted local plans, the environment and neighbourhoods at its heart.  The Bill does not contain the detail on how these changes would happen in practice; we will have to wait for secondary legislation (and also consider proposed changes to the National Planning Policy Framework (“NPPF”), as outlined below).

The Bill looks at replacing the existing EU environmental systems of Environmental Impact Assessments and Strategic Environmental Assessments with Environmental Outcome Reports, but again, the detail is to be left to secondary legislation.

The countryside does not currently feature in the Bill, as many rural action groups had hoped.  Such groups are lobbying for rural areas and countryside designations to be given additional protections in the future law, rather than to be left (often in vague terms) to the NPPF and other policies.

National Planning Policy Framework

The second set of reforms, which will be of more relevance and interest to the readers of Agricultural Lore, are those proposed to the NPPF.  A consultation document was issued just before Christmas, which looked at both the above Bill and current and future changes to the NPPF. Alongside this consultation a tracked change version of the NPPF was published, manifesting what the Government considers to be the initial, quick fix, policy amendments.

One of the most important changes to some rural estates will be the proposal for food security provisions to be factored into decisions affecting farmland.  More detail and ways of strengthening this are being discussed.

Housing requirements relaxed

Landowners considering selling land for development will also be interested in the proposed changes to weaken and make more flexible the existing housing needs requirements. This includes greater flexibility over green belts, which will not need to be reviewed, even if meeting the identified local housing need would then be impossible.  It seems that the Government’s aspirations of meeting housing needs targets will be kicked into the long grass.  This, together with the proposed changes to the 5-year housing supply and the Housing Delivery test are likely to slow down the delivery of new homes.  This is rather ironic, as the Government seems intent on penalising developers, who have been or try to build out sites too slowly.

Biodiversity Net Gain measures

Other relevant amendments proposed to the NPPF now include a warning against any developers trying to “game” the Biodiversity Net Gain system by clearing sites before the connected application is submitted.

Procedural changes

Changes of a procedural nature, which would affect all landowners, may follow after a further round of consultation on the new National Development Management Policies.  These centralised policies would contain planning considerations, which apply regularly in decision making – the first round of consultation would be on how the policies would work and then additional consultations would be carried out on each new policy.  The current wording in the NPPF in these policy areas would be the starting point for consultation and would be followed by consultations on each new policy itself.  The future NPPF would then be focused on the principles of plan making.

The proposals cover a wide range of topics and landowners are encouraged to read the consultation document and respond by 11.45 pm on 2 March.

This article was written by Charlotte Bolton and Emily Edwards.

The Court of Justice of the European Union (CJEU) has recently ruled that online retailer, Amazon, may be liable for trade mark infringement as a result of advertising counterfeit Christian Louboutin shoes on its platform. It is now up to national courts to decide.

Background

Both parties are well established in the retail sector. Mr Christian Louboutin (Louboutin) is a renowned French designer who is best known for high-heeled shoes with an iconic red sole. Amazon is an online marketplace which sells various types of goods globally through its website.

Goods are sold by Amazon both directly (in its own name) and indirectly (i.e. by providing a sales platform for third party sellers), known as a ‘hybrid model’. Orders may be fulfilled by Amazon distribution centres or by the third-party sellers directly.

Louboutin has held Benelux and EU trade marks since 2005 and 2016 respectively. In 2019, Louboutin brought claims against Amazon in Belgium and Luxembourg, arguing that Amazon was breaching trade mark rights by enabling third-party sellers to offer “identical” products without their consent.

The cases were combined and referred to the CJEU to consider, with Louboutin seeking a declaration that:

1. Amazon was liable for infringement of the trade mark at issue;
2. Amazon should cease the use, in the course of trade, of signs which are identical with that trade mark throughout the territory of the European Union, (with the exception of the Benelux territory) failing which it must make a periodic penalty payment; and
3. Amazon should be ordered to pay damages for the harm allegedly caused by that use.

Amazon maintained that its operating method is not significantly different from that of other marketplaces, such as eBay, and that the fact that Amazon’s logo is included in the advertisements of third-party sellers does not mean that it adopts those advertisements.

CJEU decision

Earlier cases had established that online marketplaces could not be directly liable for advertisements and/or products of third parties. Here the CJEU has done a U-turn and said “yes”, online marketplaces like Amazon can be held liable for the advertisement of counterfeits by third parties that infringe registered trade marks. This liability can arise where there is a confusion as to the source of the advert. i.e., where users have the impression that it is the marketplace (Amazon) which is selling the goods when making a purchase.

Some factors which may establish a link between a marketplace and a trade mark are:

1. the marketplace’s own logo being displayed, even if the product is actually distributed via a third party;
2. the additional services provided to the third party e.g. advertising and dispatching them; and
3. advertising third party products alongside the market places on brand products.

Comment

Marketplaces which only sell third party products (for example eBay) are untouched by the decision but this judgment may well cause more brands to challenge Amazon in cases with similar facts as the parameters of what is likely to attract liability have been made clearer.

It is also likely to act as a warning to marketplaces which mix their own offerings with that of third parties. Other online marketplaces which have similar operating systems may now be rethinking their website design so that customers can more clearly distinguish between third party and own brand products and therefore easily identify the origin of the goods they are purchasing.

Whilst persuasive, the decision is not binding on the UK. It is, however, binding in the EU for future cases, and it certainly clears the way for Amazon to be held liable for advertisements. It will be interesting to see how the national courts in Luxembourg and Belgium decide their cases. We will keep you updated.

Welcome to Michelmores’ privacy policy.

Overage is a key method which landowners can use to secure a share of additional value post-sale of their land. It is a regular feature in strategic land deals and can be a useful tool where land values or future sales receipts may be improved or where savings are made with development costs which the landowner wishes to benefit from. Such matters are often uncertain when a deal is originally put together.

Overage, in its simplest form, will entitle a landowner (in addition to the sale proceeds it has already received) to clawback a percentage share of any increase in value of a development. The additional value could be generated by either a new or improved planning permission, unexpectedly high sales receipts or through cost savings enjoyed by a developer.

The advice of a specialist land agent should be sought in relation to any proposed overage terms and particular attention should be given to the following issues:

1. How long will the overage last?

To be enforceable an overage must be imposed for a defined period. The appropriate ‘overage period’ will depend on several factors. For example, consider the immediate development prospects of the land. If the site is ten years away from getting planning then a longer overage period will usually be more appropriate, however, if overage runs for decades the terms may not reflect market conditions or there may be issues in tracing beneficiaries. If a site already has planning, then a shorter period may be suitable and a developer should expect it to run for the life of the scheme. If considering an overage based on sales receipts, ensure the overage includes a calculation of the market value of any un-built or un-sold units which exist at the end of the overage period (and captures those values within the overage calculation) otherwise, a developer could sit on its heels and build out slowly to avoid paying overage.

2. What will ‘trigger’ the overage?

When will the obligation to pay overage arise? This could be the grant or implementation of a new planning permission for development. A developer will prefer implementation to avoid being hit by overage before it commits to  develop. ‘Turn’ overage will capture the re-sale of the site for a higher price than the purchasing developer paid the landowner. It is important to ensure that a turn overage is triggered not just by a land sale but also by a sale of any corporate entity owning the land (to avoid the overage being circumvented by a share sale). Sales overage is also common, here overage is triggered where the developer’s gross receipts or profits exceed an agreed cap or where a developer manages to secure a reduced quota of affordable housing (thus increasing the amount of ‘open-market’ units and therefore value in a development). Consideration should be given to whether the developer is required to obtain or improve the planning position and the relevance of permitted development rights in the context of the overage trigger should also be considered.

In short, overage can be tailored to a broad range of circumstances. It is becoming more frequently used and so developers are becoming more amenable to it being included within a deal.

3. How will the overage be calculated?

Generally, this will be a percentage share of any increase in value or profit. Other key considerations in the calculation of overage will include:

• Whether a developer will be able to deduct certain costs before it pays overage – these might include planning costs or sales costs which a developer has incurred. If such costs are to be deducted, then consider whether they should be subject to an agreed cap.
• Who will undertake the overage calculation? Usually, the parties will seek to reach agreement on the amount payable and in the absence of agreement the calculation will be determined by an independent valuer or expert. However, the parties may decide that the calculation should be referred to an expert from the outset to avoid delay.
• Wherever possible a ‘worked example’ should be annexed – this is a hypothetical calculation which the parties’ commercial advisers or agents will usually produce. This should help to establish an agreed calculation of the overage and minimise legal negotiations.

4. Overage security

Landowners need to ensure that the overage will be enforceable against future owners. The two main methods to achieve this are:

• Imposing a restriction on the developer’s registered title to the site – this will prevent a sale of the site without the new purchaser entering into an agreement with the landowner to ensure they continue to be bound by the overage terms.
• Entering into a legal charge in favour of the landowner. This will be more appropriate where there is a shorter overage period and an immediate expectation that overage will be due. Developers will usually resist a legal charge as this may frustrate or complicate their own funding arrangements.

5. Releases and ‘permitted disposals’

Developers will usually require ‘permitted disposals’ which they can take control of, complete and register at Land Registry free from the security. For example, it will want to be able to sell completed houses without the plot purchaser facing liability under the overage. It is important for the parties to establish an agreed list of permitted disposals to avoid unnecessary negotiations of the legal documentation.

It is also important to agree on a structure by which those permitted disposals can take place. Where a development involves hundreds of units it will seldom be appropriate for a landowner to be involved in each and every release. Instead, it can be advisable to limit consent to key milestones – for example, on the sale of a house which results in 25%, 50% and / or 75% of the total units on site being sold. This is particularly useful where overage is linked to sales receipts and means a developer will need to engage with a landowner at regular intervals (preferably on an open book basis) to complete its remaining sales.

6. Tax and estate planning

With any luck an overage could secure the landowner additional future income. The landowner should plan ahead in anticipation of any further receipts because these may trigger additional Capital Gains Tax, Income Tax or Inheritance Tax liabilities. Landowners proposing to enter into overage arrangements should therefore always seek tax and / or succession-planning advice prior to completing their deal.

6. Should overage be used?

While overage may provide a landowner future returns, be wary where part of the upfront purchase price is reduced for overage. Best value may be better obtained by negotiating a ‘clean’ sale price rather than being reliant on future circumstances that may never arise or risk a dispute over complicated overage terms. Overage will, however, likely continue to be included on development sales as a fair way to establish the true value of the land’s development potential.

Further and more detailed information about other elements of strategic land can be found here.

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.

Many development schemes involve land owned by different adjoining landowners which is to be promoted for planning purposes as a combined site, either by the landowners themselves or through a third-party developer or promoter. Greater profit may be achieved by joining forces to create a larger more valuable scheme. This note considers how these collaborative transactions may be structured to best maximise tax efficiencies whilst being workable and cost effective.

Shared aim

Landowner collaboration arrangements can vary significantly. Different structures have been developed to ensure that multiple sellers are able to act together in the promotion and sale of combined land and these may be affected by planning requirements, the economy, underlying land ownerships and tax efficiency. A common element, however, is that the land is usually not sold in accordance with the actual land ownership but instead sale profits from the combined site are shared based on previously agreed proportions irrespective of the actual land sold. This is often referred to as equalisation.

Tax efficiency

Combining land for joint promotion and development can be inefficient from a tax perspective. Key tax considerations may include:

• Preventing multiple taxation of sale proceeds – in particular, ensuring that CGT is not payable by each landowner on the full gross amount irrespective of the equalisation;
• Avoiding proceeds being taxed as trading profits rather than capital gains;
• Not unduly bringing forward tax charges; and
• Preserving tax reliefs, VAT recovery and minimising SDLT.

There is potential, however, for the ‘tax’ tail to wag the ‘development’ dog. Complicated structures may be disproportionate to the value of the likely gains to be made. We would always recommend that parties speak to a tax adviser at an early stage.

Landowner collaborations where the landowners ‘self-promote’ the land

The landowners may agree to jointly apply for planning consent on their combined land. They will usually enter into a collaboration agreement containing provisions requiring them to sell the whole of the land on the open market once planning consent is obtained with a longstop date following which the agreement determines if consent is not obtained. The costs of promoting the land for planning consent and the sale proceeds are shared in fixed proportions. The drafting will need to reflect the type and scale of the development and deal with issues such as servicing of retained land, landowner input and control, sales of part, infrastructure requirements, overage and pre-emptions and inclusion of third-party land. Each landowner should take tax advice as this structure may not be the most tax efficient structure.

Landowner collaboration with developer option agreements

Where developers are involved from an early stage, each landowner may enter into separate option agreements with the developer who will promote the combined land for planning consent before exercising the options. The price payable under the options will reflect the equalised payments with the developer’s agreed share of the profit being deducted. The parties enter into a collaboration agreement under which they agree to share in the proceeds in proportion to the value of their land interests. Options tend to be efficient if entered into at a very early stage when the planning is uncertain as the grant of an option may trigger an upfront CGT charge, however, the right to receive a share of the proceeds will possibly have low value at an early stage. Tax advice is essential.

Landowner collaboration with promotion agreements

Landowners may enter into promotion agreements with a third-party promoter and separately enter into a collaboration agreement with each other. Please refer to our article on various deal structures that may be used when selling land with development potential for more information. The collaboration agreement will document the rights to receive a share of the proceeds of sale of the others’ land included within the jointly promoted scheme.  It will also set out the responsibilities of each party to comply with promotion arrangements and to owe each other a duty of good faith.

Landowner collaboration with cross-covenants

This structure is sometimes used to avoid multiple CGT charges and involves each landowner placing restrictive covenants on their land which they will release in return for payment when the land is later sold. The benefit being that such payments can be deducted from taxable gains for CGT purposes. This structure may, however, have a number of tax inefficiencies such as, upfront charges to CGT and loss of reliefs (good tax advice will be needed) and restrictive covenants can be difficult to enforce.

Landowner collaboration with SPVs, partnerships and pooling trusts

An obvious collaboration arrangement may appear to be the transfer of the land into a jointly owned company (often a special purpose vehicle ‘SPV’), however, this may trigger SDLT and CGT to be payable on the immediate land transfer and there may be additional tax liabilities on any sale or distribution by the company.

Another collaboration structure may involve combining an SPV with an option – the idea being that the land need not be transferred to the SPV but the SPV has an option to call for the land when planning is obtained and a buyer is found. This may, however, involve complicated arrangements which outweigh the potential benefit.

Partnerships can be more tax efficient, however, issues can arise where the partnership is deemed to be ‘trading’ leading to income taxes being payable.

Pooling Trusts can enable landowners to own a proportionate share of the combined site rather than owning a specific parcel of the scheme. The initial valuation advice is important as the value of the land held by individual owners prior to the land being ‘pooled’ is equal to the value of their proportionate share in the whole. If set up correctly, only one disposal should arise for CGT purposes on each sale. With Pooling Trusts, the land is transferred to the trust and usually a separate joint ownership agreement is entered into.

Other issues

Additional consideration will need to be given if the landowner is holding their land as ‘trading stock’, for example, if the landowner has taken steps to develop the land or acquired the land with an intention to do so.

Ultimately, specialist tax advice should be taken by each of the landowners tailored specifically to the circumstances of the transaction and the chosen structure weighed up against the potential benefits of unlocking the development potential by agreeing a land collaboration arrangement.

Further and more detailed information about other elements of strategic land can be found here.

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.