Redeveloping land will be an inevitable part of a developer's role and there are various agreement types to conduct this work. The right agreement type will be determined by several factors including, but not limited to, how the development site is assembled, the ownership structure of the site and the planning prospects for the future.
Damien Newton, Commercial Property Solicitor, specialises in property development law, with many years of expertise in advising on all commercial aspects of this area, having worked within law firms across the South as well as in-house for a property developer. We are therefore well placed to offer you the practical advice you require in order to take the next step in your redevelopment.
Given the vast scenarios that can arise, for the purposes of the following information, we are using the example of a developer carrying out the redevelopment of land who has been in discussion with a landowner about the redevelopment of the latter's development site and the developer owns none of the properties in the development site. We are, however, fully experienced in advising on all situations regarding property development, so would advise you contact us to discuss your situation further with Damien or a member of the team.
What are the various agreement types?
Understanding how the site is assembled is a crucial stage, so as to allow a planning application to proceed with all the land under the developer's control. We are not considering compulsory purchase powers.
If the development site is in different ownerships, the developer will need to bring all of the land within the development sites within its control and that process is known as site assembly. The developer will seek to achieve this by negotiating with the current landowners to bring the land required for the development project under its control by agreement by negotiating any of the following types of agreement:
- Option agreement.
- Land Promotion agreement.
- Conditional purchase.
- Hybrid Agreements.
- Purchase with overage.
- Purchase with overage.
- Unconditional purchase.
- Pre-emption agreement.
Option agreements
In our view, this is the most flexible form of agreement for a developer or land trader. A call option allows the developer to call on a landowner to sell a property to it. The option may be exercisable at any time during the option period or only on the occurrence of certain events (such as planning permission being obtained). However, the decision whether or not to exercise the option rests with developer.
These are the most common type of option agreement encountered in practice as they have several advantages for the developer:
- The developer has complete discretion over whether or not to buy the property.
- This is particularly useful in site assembly where several plots are required from different landowners. The developer can ensure it has first secured all the plots before submitting planning and incurring costs.
- The developer will normally negotiate the right to buy the land for a fixed price or a discount of the Open Market Value to be calculated once planning permission has been obtained.
- The developer can apply for planning permission knowing that it can buy the property if it is successful, but does not have to buy if planning permission is not granted, if it is granted subject to unacceptable conditions or if market conditions mean that the developer no longer wants to proceed with the development.
- Minimal outlay is required at the initial stages before the developer knows whether planning permission can be obtained, although some land owners may want an up-front and non-refundable option fee before entering into the agreement.
- This agreement is registrable at Land Registry and will bind successors in title to the landowner if they sell the land to a third party.
Put option
A put option enables a landowner to give notice requiring the developer to buy the property. The landowner may be able to give notice at any time during the option period or only when certain conditions precedent have been met. However, with this type of option, it is the landowner that decides whether or not to exercise the option. A put option is unlikely to be attractive to a developer for this reason.
Put and call options arise where the developer is given a call option and in return the developer grants the landowner a put option. The developer has the ability to exercise the call option during the option period and the landowner is able to require the developer to buy all or part of the property. Both options are likely to be exercisable only on certain conditions precedent being met.
Land Promotion agreement
Land promotion agreements are increasing in popularity as an alternative to option agreements, particularly as they can be easier to negotiate and agree with landowners as there is no conflict of interests between the parties. They are more common for unallocated green field sites, which have a medium to long term potential for development. If the planning prospects are likely in the near future then an option agreement or conditional contract may be more suitable. Under a land promotion agreement:
- The developer typically agrees to:
- apply for planning permission for a development on a landowner’s property; and
- market the property for sale on the open market once planning permission has been obtained.
- The developer funds the planning and marketing costs initially and these are refunded when the land is sold.
- If planning permission is obtained, the landowner sells the property. The developer's costs are reimbursed out of the gross sale receipts and they receive a pre-agreed percentage of the net sale receipts.
- If planning permission is not obtained by a certain date, the agreement automatically terminates and the developer's costs are not normally reimbursed.
The advantage of a land promotion agreement over an option agreement is that, under an option agreement, the landowner is usually obliged to sell the property to the developer at a discount once planning permission has been obtained and land traders or promoters may be selling the land on to a house builder for a significant uplift that the landowner will not benefit from. This gives rise to a conflict of interest between the landowner and the developer. The landowner wants to maximise the purchase price, while the developer wants to minimise the purchase price. However, under a land promotion agreement, once planning permission is obtained, a marketing strategy is agreed and the property is to be sold on the open market. The property will not normally be sold to the developer, unless it is a hybrid agreement, allowing the developer to buy the land if they match the best offer received after proper marketing.
The landowner and developer share the uplift in the value of the property with the benefit of planning permission and the process is much more transparent for the landowner. Therefore, there is no conflict of interest and the developer is incentivised to carry out its obligations to promote the property through the planning process, keep planning obligation costs low and achieve the highest purchase price on the open market.
Conditional purchase
A conditional contract is a binding contract for the sale and purchase of land which is subject to satisfaction of one or more conditions precedent (for example, the developer must obtain a satisfactory planning permission before the sale and purchase provisions can become operative). If the developer agrees to this type of arrangement, careful drafting will be needed to ensure that the condition is carefully defined so that the developer is only bound to buy the land if the planning permission is free of onerous conditions. These type of arrangements can take longer to draft for this reason and the developer will also want to have carried out full due diligence on the land before exchanging a contract conditional on planning.
The elements of a conditional contract are:
- The developer carries out full due diligence on the land before they enter into a binding contract with the landowner for the sale and purchase of land which is conditional on certain defined conditions precedent being met. These can include (but are not limited to) title conditions, planning conditions and third party land conditions.
- On the conditions being met, the contract for the sale of the property by the landowner to developer will become unconditional and the sale will proceed on the terms set out in the contract. If market conditions have changed since the contract was entered into, the developer will not be able to back out of the purchase without losing their 10% deposit and risk being sued for breach of contract.
- If the conditions are not met by a pre-agreed long-stop date, the contract will terminate automatically or may be terminated by one or both of the parties.
If the landowner is willing, we would always advise the developer to seek an option instead of a conditional contract so that they have absolute discretion over whether or not to buy the land.
Hybrid agreements
Hybrid agreements can be beneficial to both parties in certain scenarios, but it is important that tax advice is taken at the outset. They are normally encountered on larger strategic sites which can be delivered in phases. Some phases will be bought by the developer/promoter with at least 50% usually being sold in the open market on a fully serviced basis. Once the infrastructure and any onerous planning conditions have been discharged by the lead developer the remainder of the development site should be more attractive.
Another benefit of the hybrid agreement is the ability for the lead developer to deliver infrastructure and some initial housing which creates an ambiance for the wider scheme. This can help to elevate the wider scheme when it is marketed for sale.
Hybrid arrangements are also flexible allowing the lead developer to deliver an element of the scheme but with the open market sale element creating a firm understanding of land values. They are generally dealt with on an open book basis giving landowners the security of knowing they are getting the best price.
A well drafted hybrid agreement will take the best features of promotion and option agreements to benefit both sides. The landowner has the benefit of choosing a lead developer that can provide the onsite infrastructure and some early phase housing to enhance the longer term development of later phases or simply take a commercial approach to the whole operation.
Purchase with overage and unconditional purchase
Purchases subject to overage and unconditional purchases tie up large amounts of capital and are usually a last resort for a developer. However, they can be useful where the unconditional price is significantly below the potential market value of the land if planning permission can be obtained and where the planning risk is considered to be low (i.e. the development site is allocated in the local plan for development or sits within the defined settlement boundary). If the parties agree a sale subject to overage, the landowner and developer agree to enter into an overage agreement on completion of the developer's purchase of the landowner’s land.
An overage obligation requires developers to make a further payment to the landowner if an agreed trigger event occurs within a certain period following completion of the developer's purchase. Overage obligations enable the landowner to sell at the current use value of the property without having to forgo a share in the development potential of the property when that is actually realised.
Overage provisions are not appropriate in all situations. If the likelihood of the land being developed is remote, the cost of negotiating complex payment provisions can outweigh the chances of the overage payment ever being made. Overage provisions may also affect the purchase price that the developer is willing to pay for the land at the outset.
The landowner must ensure that the potential overage payment by the developer is secured effectively. There are various ways in which overage obligations can be drafted and secured.
The developer could simply acquire the whole or part of the development site by negotiating a purchase of the land from the landowner which is not conditional on the satisfaction of any conditions precedent. This is suitable if the development site already has planning permission and the developer simply wants to build it out or if the price agreed is attractive enough to entice the developer to commit a large sum of capital up front, with no certainty that the development site can be re-developed as desired.
Pre-emption agreement
A right of pre-emption or first refusal over property gives the developer a right to buy the property if, but only if, the landowner decides to dispose of it during an agreed period. It is different to a call option where the developer has the right to call on the landowner to sell the property to it and the landowner is then contractually bound to sell to the developer.
However, under a right of pre-emption, the developer cannot force the landowner to sell the property to it and a pre-emption agreement may be unattractive to the developer for this reason.
To discuss in more detail the various types of agreement for land redevelopment, or to seek legal advice for your future property plans, you can contact Damien Newton on 023 9277 6554 or email damiennewton@warnergoodman.co.uk.
