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.

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.

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.

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.

Option agreement

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:

• The parties’ interests are generally aligned, until the price negotiation stage. Until then, both parties want to see planning permission granted. Once planning permission is granted, there will be a negotiation on price and there may be a significant difference between what the developer is offering and what the landowner is seeking. If the price can’t be agreed, the option will usually provide for expert determination. A key protection for a landowner is therefore the inclusion of a minimum price clause with indexation, and a cap on the recoverable planning and promotion costs.
• Timing is another area where the parties may not be aligned. The developer may want to slow down the planning process to accommodate other competing priorities. To address this, timescales can be built in to govern the planning process. However, landowners should proceed with caution before imposing strict timescales. It may be more advantageous for both parties to delay the application so as to wait for a more favourable local planning landscape, and generally the developer is best placed to assess this.

Promotion agreement

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:

• The parties’ interests are aligned to an extent in that the land owner and promoter both want to get planning permission which maximises value. However, the promoter will naturally want to recover its significant planning outlay as fast as it can.  Therefore, the promoter may be keen to press ahead with marketing so as to realise its return, even in an unfavourable market, whereas it may be better for the landowner to wait for the market to rise again. Clauses which suspend marketing where the land values have fallen by an agreed percentage can protect a landowner.
• The promotion costs are generally recoverable when the land is sold, and can be significant, therefore a cap on these costs will provide some protection to a landowner.
• As the design of the scheme evolves, it may become apparent that third party land is needed to provide services or visibility splays. The promoter will be required to negotiate the acquisition of such land but the landowner should have the right to approve the costs, acting reasonably, otherwise there is a risk that the promoter will pay over the odds leaving the landowner to foot the bill.

Hybrid agreements

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:

• Is the site large enough to warrant splitting it up and marketing it in phases? A phased sale process is complex because the section 106 and planning obligations need to be apportioned between different developers, and obligations need to be imposed to deliver roads and services for the benefit of the serviced parcels. This can increase the cost of selling the site.
• The element of competition in an open market bidding process can be what makes these agreements attractive to a landowner. However, developers may be nervous of a third party with a particular motivation coming forward with a specially high bid for the market phase, resulting in an inflated market value for later phases. Under a pure option, there is less scope for a special purchaser scenario to arise because the valuation process generally precludes this.

Planning

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 [2022].  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.

Best fit

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.

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.

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 landowners’ position a minimum price return and a cap on costs may be included. Please refer to our article on ‘the pros and cons of option, promotion and hybrid agreements’ for more information.

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 being that when consent is secured the land is sold on 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 that 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.

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.

It was announced on 6 February 2023, that the Law Commission, the body responsible for reviewing existing law and suggesting reform, will undertake a review of the existing laws surrounding compulsory purchase powers and compensation.

The Department for Levelling up Housing and Communities has asked the Law Commission to review the current law on compulsory purchase, in light of a renewed focus on critical infrastructure projects required across local communities in England and Wales. It follows concerns that the law of compulsory purchase is “fragmented, hard to access and in need of modernisation”. The review also follows the Government’s commitment in its 2022 White Paper, “Levelling Up the United Kingdom” to enhance compulsory purchase powers.

On its website page advertising the proposed review, the Law Commission states that it will examine the procedures governing the acquisition of land through compulsory purchase orders and the system for assessing compensation awarded to parties in relation to such acquisitions.

In his statement on the proposed review, Nicholas Paines KC, the Public Law Commissioner highlighted the need for the legislative regime around compulsory acquisition to be “effective, consistent and clear to both landowners and acquiring authorities – but the current laws are fragmented and complex, often leading to uncertainty and unpredictability.”

The initial statement by the Law Commission indicates that such reform will be to ensure that local authorities find their powers easier and more efficient to manage.

Whilst the Law Commission previously reviewed compulsory purchase in the early 2000s, those reviews were not implemented in full and since then, only partial changes to the law have been made. There are some changes to compulsory purchase rules currently being considered by the House of Lords in the version of the Levelling Up and Regeneration Bill now in the Lords, but the proposed changes would appear to go further than the suggested reforms, which are now in the Bill.

The Law Commission has stated that preliminary research on the review will being within the early part of 2023 and will include a pre-consultation engagement with stakeholders. It is anticipated that a consultation will follow shortly thereafter.

The relevant part of the Law Commission’s website can be found here.

For any questions arising out of this e-alert, or to discuss compulsory purchase more generally, please contact Helen Hutton, Adam Corbin or Jake Rostron.

Frequently land being acquired for development will be subject to agricultural tenancies as the seller will have sought, and will continue to seek, value from the land as it is marketed and negotiations progress.

Such tenancies are typically seen as being unproblematic, often readily terminable, either prior to completion or afterwards if the buyer is in less of a rush or because the tenancy won’t immediately allow.

However, notwithstanding any written tenancy agreement preventing subletting, it is not uncommon for an agricultural tenant to diversify and to allow third parties to use or occupy parts of the land it is not using. This can create real difficulties in obtaining vacant possession where the use is not an agricultural use. In such instance that additional third party may have acquired rights under the Landlord and Tenant Act 1954 which can make it much more difficult, and likely costly, for a Seller to recover possession for them irrespective of the ease of recovering possession from the primary tenant: it cannot be assumed that their status will be the same as the primary tenant occupier and terminable in the same way, or by the same notice.

Unfortunately, the information that a seller is able to provide is often quite limited as even if it is aware that the tenant has allowed others to occupy, it may not be able to provide sufficient detail to enable a purchaser to have certainty as to how and when it will be able to obtain possession.

Legal advice should always be sought when considering the ability and timings for obtaining possession against a third party occupier, but, we would recommend that due diligence is undertaken at the early stages of considering site viability. As a starting point:

1. Carry out a thorough site inspection during working hours, where possible, making enquiries of anyone in occupation, but, as a minimum, taking a record of all those using or occupying the land along with the nature and extent of their occupation.
2. Request copies of any tenancy agreements, details of any informal arrangements allowing third parties onto the land and details of anyone known to be occupying or using the land.
3. Where occupiers are identified; the nature of the use, the extent of their occupation, when they took occupation and if and when any rent is paid.

If any occupiers are identified that are not subject to written tenancies consider taking legal advice at an early stage, before heads of terms are negotiated and agreed. The issue is typically not if you can recover possession, but the timings and costs may impact upon viability and, therefore, could be relevant to the eventual terms that are agreed.

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.