In our role advising landowners and farmers throughout the north west, we are frequently asked how future development can be reflected in any sale. Clearly there is no standard answer and we have to look at each case on its own merits, considering many factors.
We’d be looking at how likely development is to occur and when. Is it in the Local Plan? Is it Green Belt? Is it close to a settlement? Is the access appropriate? Do we need any third party owners involved? Whilst the importance of development cannot be overlooked, on many occasions it can be too remote to consider.
We also need to look at the owners’ objectives. Are they looking to sell now, or is the land a long-term hold?
Depending on our assessment of the site and discussion with the owners there are four principal ways to deal with securing best value. These are overage, option, promotion and conditional contract.
Overage Agreements
If an imminent sale is required, then using an overage agreement may well be an appropriate choice. This is where the buyer agrees to pay a percentage of future development profit to the vendor. The key points are to agree the percentage and the timescale for the agreement; for example, 30% of the uplift in value for 25 years. However, agreeing these headline terms is only part of the requirement. Agreement is needed on the “trigger” date for payment to be due. This could be the date on which a planning consent is granted, the date on which the land is sold (subject to planning) or the date on which planning is implemented. There may be other dates, such as the sale off of completed properties, but the three noted are the most common. Buyers tend to resist paying out on the grant of planning consent, as at that point they have realised no income from the development.
Overage agreements are necessarily complex documents. They need to cover every foreseeable eventuality. What is the definition of development? What is the buyer/owner allowed to do on the property? How are costs of securing planning covered? Does the agreement cover multiple applications? If there is a requirement for a s106 planning agreement (e.g. to fund local education or highways), who funds this?
Whilst many vendors are keen to implement an overage contract, it may not always be appropriate. If development is extremely unlikely there may be no benefit in incurring additional costs (fees can be quite significant) and potentially putting off buyers (who will also be incurring extra legal fees).
Option Agreements
An option agreement is between and landowner and a developer whereby the landowner agrees to sell the site to the developer once the developer has obtained a planning consent. The two headline points are the length of the agreement (the term) and any discount from market value that the developer will take to allow for the costs of the planning consent and risk. However, as with overage agreement, the devil will be in the detail. Thought needs to be given to any extensions of time and allocation of planning costs, including s106 agreements. Agreements may be complicated by tranche sales or staged payments. There may be a requirement to use third party land to facilitate the scheme, to provide access for example. Where there are multiple landowners (even if in the same family) then it is common for there to be a collaboration or equalization agreement.
One issue with option agreements is the assessment of Market Value once the land is sold. This can often lead to disputes, although a robust mechanism contained with the agreement will help.
We often recommend an option where a particular developer is best placed to deliver a scheme, maybe they have already secured adjacent land or perhaps they have a speciality that is important.
Promotion Agreements
Promotion agreements are similar to option agreements but the landowner contracts with a promoter. The promoter funds the planning application and, once consented, will sell the site to a developer. One of the key benefits of a promotion agreement is that the land is sold on the open market, so the landowners’ receipts are very clear. The promoter will take a percentage of the landowners’ receipts, but if no consent is granted they will not be reimbursed the planning costs they have incurred, which could be significant. The percentage of income they take will depend on their risk profile and their assessment of the likelihood of gaining consent.
Conditional Contract
One further method of sale is a conditional contract, where the landowner and developer enter a regular sale contract, but conditional upon the grant of planning consent. This usually only works where the time frame for securing planning consent is very short, so the sale price could be agreed at the outset.
General Tips
There are many twists and turns to all of the above arrangements and it is essential that landowners obtain professional advice. It is vital that a clear mechanism for assessing payment is established and there are other factors to consider, such as being able to let, sell or transfer the land whilst subject to the agreement (for options and promotions). At Oakwood we work to provide robust and detailed Heads of Terms for solicitors to create the final documentation.
Graham Bowcock MRICS, MRAC
