Strategic land is rightly seen as a somewhat esoteric and specialist branch of commercial conveyancing, much of it shrouded in jargon and prone to abrupt change. Whilst it is no place for the faint hearted, nonetheless there are certain broad concepts which are easily understood, both by the non-specialist lawyer and by the lay client.
For the landowner who has a parcel of land which may have development potential, it is absolutely critical that he chooses not only the correct "partner" for taking the land through the planning process, but also the correct contractual framework. There is an array of possibilities available, and much will depend on how likely and imminent a planning permission is. If the land has already been allocated within a Local Plan or similar statutory planning framework, then perhaps a conditional contract with a fixed price would suffice. On the other hand, for land without such an allocation, and with no guarantee of future success, this will not be appropriate. This article looks at such a situation.
Historically, the Option Agreement has been the go-to solution. Put simply, the landowner grants a developer the option to buy the land at its then current market value when planning permission for development has been granted. The developer is placed under an obligation to do all it can to obtain planning permission for, say, residential development, or for mixed use development. The Option Agreement would also contain the following provisions:
- The length of the Option Period - usually governed by how difficult it will be to obtain planning permission;
- Complicated valuation provisions, normally designed to give the developer an advantage;
- A discount against the market value that the developer will be entitled to for its efforts;
- A claw-back of the costs incurred in the promotion, such as planning consultants' fees and the cost of specialist reports such as ecology and highways; and
- Dispute resolution provisions in the event that the landowner and the developer do not agree the price.
Option Agreements can work well, but a disadvantage is that there is only one person in the market to buy the land: the developer. The negotiations on price are therefore set against the background of a notional market, and not the actual market. Landowners can feel cornered and their only alternative to capitulating is to go to an arbitrator or expert to resolve the dispute, which costs money, causes delay and is of uncertain outcome.
An alternative, which has gained prominence recently, is the Promotion Agreement. It has many of the same features as the Option Agreement, but with the important difference that the promoter does not buy the land. Instead, when planning permission has been granted, the landowner and the promoter get together and create a marketing strategy. Typically, this would involve agreeing:
- The means of disposal - such as private treaty, public tender or auction;
- Whether to dispose of the land as a whole, or in tranches;
- The asking price; and
- Whether to include an uplift provision in the sale terms.
The advantage of this scenario is that the landowner is involved in the overall process of the sale, and has the comfort of seeing the land fully exposed to the market, to achieve the best possible price. The process is transparent, and the landowner has a degree of control at all stages. This is of particular interest since the onset of the banking crisis, as landowners want to see the actual value of their land, not a value produced by reference to the Red Book – the RICS Valuation Standards Handbook.
Clearly, these different types of Agreement bring different types of parties to the table. A developer is unlikely to enter into a Promotion Agreement as it would not be able to ensure that it had the ability to buy the land. It would have to compete in the market and pay the best price. On that basis it would prefer to enter into an Option Agreement. There are specialist companies around who deal in Promotion Agreements. They have no desire to buy the land themselves, and make their money by taking a percentage of the sale price of the land. It is in their interests to maximize the sale price so as to maximize their profit.
There are two points which Options and Promotion Agreements share, and which are often overlooked:
- It is essential in both cases to put a cap on the amount of Promotional Costs that the developer or promoter can recover. These costs can mount up, and erode the landowner's profits unless they are kept in check; and
- It can be desirable to put minimum land values or sale prices in the agreements.
Specialist legal advice is needed in dealing with strategic land. However, advice from a specialist land agent or surveyor is also essential when agreeing Heads of Terms for the promotion or sale of strategic land. Mistakes can be expensive in this field of the law.
Beaufort Montague Harris
DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic.
Published on 29th May 2013
(Last updated 28th March 2018)