The government’s recent indication it would relax some planning legislation holding back development (see this) has led to some excitement amongst the housebuilding community that their historic projects might finally be about to get off the ground. Equally excited therefore are the landowners with the sort of land they may be interested in! Those landowners range from the elderly couple with a large garden they don’t use on which couple of plots might be built, up to the farmer with many acres that just happens to be the important piece of the jigsaw in what might be a huge new village development.
Either way it is easy to get excited when a housebuilder’s representative knocks on the door and offers you a few thousand pounds upfront for an “option” or what he might call a “conditional contract” or “lock-out agreement” to acquire this land from you.
If you are approached then hopefully these five tips will assist in getting the negotiations off to a good start:
1 Your advisers and their fees
First things first. Don’t agree or sign anything! Get a good, independent land agent (chartered surveyor) and an experienced solicitor on-board as quickly as possible. That won’t necessarily be your estate agent nor the law firm who did your conveyancing when you bought the property. In fact, sorry, the very first thing is to get the housebuilder’s representative to agree to underwrite these costs at the outset! You don’t want to be paying good money to your professionals only for the housebuilder to change its mind and walk away, leaving you to pick up the tab! How do you find appropriate professionals? Ask around. Get recommendations from people you know and trust. Both the surveyor and the solicitor must be experienced in acting for and against developers in projects like this.
2 The Property
Be very clear exactly what it is the developer wants from you and exactly what you are prepared to sell. Get them to draw up a scaled plan showing exactly where everything is. If the land is sold to the developer, will you be left with anything afterwards? Will you need a right of access over the land they have bought from you? Will they need any rights over your land for example to bring new services and so on into the development site? How will all that work in practice? You might also want to make it clear that if they were to exercise the option then they have to buy the whole lot and not just cherry pick parts that they want, leaving you with potentially unusable strips of land around or in the middle of a development site!
This is perhaps one of the biggest issues for options. The developer will want maximum flexibility and as long a period as possible to get the planning permission it needs before it can actually buy the land from you. From your perspective you will not want to tie up the land for too long, as whilst it is under option you probably will not be able to sell it nor do anything with it yourself, for example redevelop it for your own purposes. A balance therefore has to be struck therefore between the developer’s reasonable needs for time to get planning permission that they can commercially exploit and your desire to be able to use what is after all your land. A developer might even want the right to appeal a planning permission application (but might not want to be obliged to do so) and potentially that could run for quite a few years if you are talking about a huge project. Basically though, the longer you are prepared to tie up your land, the more the developer should be prepared to pay upfront as a nonreturnable option fee.
4 The Price
The price ultimately payable for the land will obviously be the cause of much debate and part of the reason why you need a specialist surveyor on your side from the outset. The normal position is that the developer will pay a percentage of the open market value of the land once planning permission has been obtained for the development. That percentage will vary but is likely to be in the region of 70-90% or so. The document will need to provide that in the absence of any agreement between your surveyor and theirs on what the open market value is, then an independent third party expert can settle the point for you both. Either way, the percentage formula works so that the landowner will therefore get the bulk of the money representing the value of the land but that the developer will be entitled to a discount to reflect the skill and expertise they have undertaken in getting the planning permission, effectively on your behalf.
Other deals might be done in relation to deductions being made from the price to reflect the actual costs in getting the planning permission (fees etc) and even the upfront costs of providing you the option fee and reimbursing your legal or professional costs etc.
It’s also essential from a landowner’s perspective to build in some protection that there will always be a minimum price for the land. Depending upon how long the option runs for, that minimum price might need to be indexed linked as well.
5 Remember this is an Option
Do remember that the option is just that. The developer will not want to be forced to buy the property just because they get any planning permission. They will want absolute discretion in determining whether the permission they have obtained, and the price they might have to pay for the land, makes it commercially sensible to proceed or not. The landowner will nevertheless want the developer to be under an obligation to use reasonable endeavours etc to get as good a planning permission they can and it would be usual for the landowner’s surveyors to have an ongoing monitoring role (at the developer’s cost) during the course of the option to make sure that they are performing properly.
Options are complex and there is sometimes a danger that the landowner can be swept away in the excitement of it all once a cheque is waved in front of them from a developer. Getting appropriate professional advice on the outset is essential to protect the landowner’s interests and these five points are the very basic minimums that need to be considered. Other aspects will usually need to be looked at in some detail by the advisers such as requirements to enter into “planning agreements”, the “equalisation” of infrastructure costs where development takes place on a much wider area, so-called “clawback” provisions that prevent a landowner missing out if the developer buys the land but then gets an enhanced planning permission and in particular careful thought always has to be given if the landowner will be retaining any land after completion. There may even be tax consequences for the landowner which can be avoided or mitigated if everything is set up correctly from the outset.
Do seek professional advice and by all means contact me for an initial no obligation chat.