Unlocking development potential
The UK is facing a shortage of development sites, with land availability being described as either limited or very limited. This shortage of development land, combined with developers' ambitions to meet the government's housebuilding target to address the chronic undersupply of housing, have led to continued growth in land values. There are a number of ways for landowners and developers to work together. Here are common examples of structures which can unlock these potential development sites and enable landowners to retain the use of their land for as long as possible.
Conditional contractsConditional contracts are entered into between landowners and developers for the sale of land for development. The contract is conditional upon certain specified conditions being met before the land is transferred to the developer and the purchase price paid. Often these contracts are conditional upon the developer obtaining planning permission for the proposed development. The benefit is that landowners can sell development sites upfront without the need to obtain planning permission, whilst still realising development land values. Landowners can continue to use their land until such time as the condition is met and the transfer completed. During the period that the developer is seeking planning permission, the landowner can continue to farm and claim land payments. Conditional contracts also give all parties certainty that (once the condition has been met) the transaction will be completed, meaning that the landowner must sell and the developer must buy the development site.
Option agreementsOption agreements tend to be more speculative than conditional contracts, generally lasting for several years. The option gives the developer the right to buy the development site from the landowner during a defined period, called the option period, for either an agreed fixed sum or a price to be calculated later. Option agreements are similar to conditional contracts in that generally the exercise of the option and completion of the sale is subject to conditions being met, usually the grant of planning permission. It is usual for the landowner to also receive an upfront payment in return for the grant of the option. However, the difference between an option and a conditional contract is that once the conditions are met, completion will only take place if the developer exercises the option. Which they may not wish to do, for example if market conditions have worsened.
So, unlike with conditional contracts, the landowner does not have the certainty that the developer will buy the site. As with conditional contracts, one of the main benefits of option agreements for landowners is that they can continue to use their land until such time as the developer calls for the sale. The landowner will also benefit from an initial option fee and even if the developer does not proceed the landowner would generally benefit from the planning work undertaken by the developer.
Promotion agreementsPromotion agreements cover a broad range of agreements. Generally, they relate to speculative sites that may not be allocated by the Local Planning Authority for development. As the name suggests, the aim of promotion agreements is to promote the site for development. The promoter will usually liaise with the local authority with the aim of allocating the site for development, seek to obtain planning permission and market the sale of the site to developers once permission has been obtained. The benefit of promotion agreements for landowners is that the promoter bears the upfront costs of obtaining the planning permission and marketing the site. Generally, the promoter is paid from the net sale proceeds, only if the land is successfully sold to a developer with the benefit of planning permission. As with conditional contracts and option agreements, landowners can retain the benefit and use of their land until such a time as the land is sold and allows the landowner to realise the uplift in value of this land with the benefit of planning permission.
Overage agreementsWhile overage agreements are not strictly mechanisms by which development land can be sold and purchased, overage agreements are a common means of safeguarding landowners from missing out on future uplifts in the value of the site after it has been sold. The benefit of an overage agreement is that it enables landowners to sell, confident that if the land is sold on by the developer or developed under a more valuable planning permission, then the landowner will be entitled to a further payment should the land attract a higher value. Importantly though, overage agreements do not guarantee future uplift or payment, but provide a mechanism to secure that the landowner shares in any uplift realised. The payment of overage will usually be dependent upon certain conditions being met such as the grant of planning permission or the amount of the developer's sale proceeds for the site exceeding an agreed threshold.
Trowers & Hamlins are market leaders in supporting clients through these contractual options, helping you to navigate the best future for your land assets. Please get in touch with our team if you'd like to learn more.