When approached by a developer who wishes to buy their land and whether or not the developer specifies the type of agreement they wish to use, a landowner will find it useful to know about the various types of sale agreement available as well as the implications of the developer’s proposals before proceeding.
The types of agreement available include:
- Option agreement
- Sale conditional on planning consent.
- Pre-emption agreement
- Land Promotion agreement.
- Sale with ‘overage’
We describe each of these below with a summary of some pros and cons from the seller’s perspective.
Option to buy
An option agreement is usually the preferred choice for developers, especially where they are assembling a site owned by different landowners. This gives them the opportunity to seek planning consent and to decide whether or not to commit to the purchase within a set time period (‘option period’). This can range from a number of months to a few years. As a guide one to two year options are not uncommon.
Some sellers want the developer to be proactive and submit a planning application within a set period while others are content to allow the developer free rein to do as much or as little as they wish. Either way the developer is entitled to walk away regardless of whether they apply for or obtain planning consent.
The seller would normally ask for a non-refundable fee on exchange of agreements and in return for tying the land up for the fixed period.
Pros:
- Allows for a sale price that takes the development prospect into account. Especially where the seller’s land is to be developed with other land the sale price can be higher than the development value the land may have on its own.
- The seller can ask for a potentially significant non-refundable option fee.
- A seller can reasonably expect the buyer to cover the seller’s reasonable legal and surveyor’s costs.
- The contract can be more straightforward and quicker to settle than the other types of sale contract.
- Suits sellers who are content to sit back and take a more ‘hands-off’ approach.
- The seller can benefit from a potential increase in value should planning be granted but the developer walks away, and at no cost to themselves.
Cons:
- This puts the developer in the driving seat without guaranteeing a sale.
- May be used as a means of ‘land banking’ with limited intent to purchase.
- Limits what the owner can do with the land during the option period (letting, re-mortgaging).
- Slow planning progress and lack of updates can be frustrating for some.
Conditional contract for sale
This is a binding agreement for sale conditional on a satisfactory planning consent being granted for a defined development. Although a sale is still not guaranteed, it is seen as more likely than with an option agreement as it obliges the developer to make and pursue a planning application for a defined development within a fixed period and they are then bound to complete within a fixed period if and when satisfactory planning consent has been issued. The seller can specify the extent to which they are to be updated or involved in the planning process.
This can be suitable if the developer has their finances in order and are more resolutely committed to the development.
Pros:
- This requires the developer to seek planning consent.
- Allows for a sale price that takes development prospect into account.
- A greater chance that the sale will complete if the planning prospect is good.
- A non-refundable ‘tie-up’ payment may be agreed depending on the negotiating strength of the parties.
Cons:
- A sale is still not guaranteed.
- Tighter drafting required, for example, to clearly define a satisfactory planning consent, so it can take longer to settle than an option.
Pre-emption agreement
These types of agreement are less common. If the seller decides to sell the land they must first offer to sell to the buyer during a set period. The seller will be free to sell to someone else if the buyer does not respond to an offer notice within a specified time.
Pros:
- Does not commit either party to action until the seller decides to sell.
Cons:
- Narrows the opportunity to follow through with a good third party offer. Other potential buyers may be put off if they need to move quickly.
- Can be more difficult to agree how the sale price should be set and presents more opportunity for dispute and delay.
- Less likely to be acceptable to a mortgage lender.
Land Promotion Agreement
This is a collaborative arrangement where the developer (promoter) agrees at its own cost to apply for planning consent for a development on a landowner’s property and to market it for sale once permission is granted. The promoter’s costs are recouped from the gross sale proceeds and the parties share in the net sale proceeds. The agreement falls away if planning permission is not obtained by a set date.
Pros:
- More collaborative. Both parties wish to achieve the highest value possible.
- The buyer does much of the work initially and without the seller incurring initial costs.
Cons:
- Good faith required and potential for dispute as to marketing methods, how sale prices are set, the accepting of offers and allocation of costs.
- Careful drafting required to limit this risk and it can be more costly and take more time to settle this type of agreement than with the others described
Unconditional sale with ‘overage’
The parties proceed with a sale in the usual way at a sale price that may not reflect the development prospect, but with provision for the buyer to pay an additional ‘uplift’ payment to the seller if within a specified period they:
- Obtain planning permission; or
- Implement a planning consent; or
- Sell the land either with the benefit of planning consent or once developed.
The overage period can be as long or as short as the parties are willing to agree. 5 or 10 year overages are quite common and they can extend to 25 years or more.
The uplift can be set according to indexed increase, market valuation at the time of payment or a fixed percentage.
Pros:
- Allows for a sale at market value straight away with the chance to share in the uplift in value if a development prospect is realised later on.
Cons:
- It can be a challenge to agree sufficiently reliable overage clauses from the seller’s perspective. For example the definition of what a ‘development’ is for overage purposes needs to be carefully thought through. The developer will require the provisions to be as ‘loose’ as possible while the seller wants them to be as ‘tight’ as possible.
- The seller is less free to step away entirely post-sale – they will need to be prepared to monitor whether and when the trigger for payment arises and then to incur time and cost in enforcing the overage payment if the developer tries to circumvent it. This may not suit a seller who wishes to walk away and wash their hands of any involvement with the property.
These are the more frequently used types of sale contract. There are other less common types of agreement or variations of these which are not described here but which may suit the parties’ requirements.
Our commercial property team at our Enfield office are on hand to help landowners consider the key factors that are relevant to them when selling land and so that they can settle on a way forward that suits them.
Please contact Hannah Collins on 0208 363 4444 for further advice on all commercial property matters.
