The following blog was written by David Ashton who is Head of Rix & Kay’s Commercial Property and Planning team.
A guide for those who are considering entering into an agreement with regard to the potential development of the land.
In most cases either experienced land acquirers or professional valuers and land agents negotiate the terms of a land transaction relating to its potential development. They do so with a view to agreeing what are called Heads of Terms (which are not usually legally binding). These terms can be simple or extensive and will include whether an option fee is payable, how the purchase price is established and the length of time the purchaser has to complete or exchange legally binding unconditional agreements. The principal terms are often supplemented depending on the nature of the agreement and I have set out below some examples.
These terms enable the solicitors representing those parties to negotiate the more detailed documents incorporating the Heads of Terms in order to reach the most appropriate legal agreement in order to make the deal legally binding.
The purchasers and sellers or their agents should know the current state of the market and appreciate what commercial terms are achievable for the location and potential use of the land.
Depending upon the nature of the transaction and the desire of the purchaser and seller, I have set out below what type of document might be appropriate for implementing the terms agreed.
Land development, sale or purchase under conditional contract
- Binds both parties legally on exchange to buy and sell subject to the condition of obtaining planning permission. There can be other conditions that need to be satisfied that also can be included
- Often favoured by the seller as obligations should be placed on the purchaser to obtain planning permission.
- It is preferable to establish what planning conditions the purchaser would find unacceptable so that there is greater clarity as to what permission would be regarded as satisfactory to the purchaser. This gives the purchaser less wriggle room to avoid having to proceed to complete.
- More often used when there is a fixed price (although a market price agreed or determined post grant of planning permission still can be provided for), and a relatively short time to obtain planning permission by reference to a Long Stop Date (the date when the agreement has to be completed by unless satisfactory planning permission has not been obtained, in which the case the contract comes to an end).
- More likely to be used where the land in question is in an area already allocated for development as far as the local planning policy is concerned, or if the purchaser is confident that a desired planning permission will be obtained.
Land development, sale or purchase under simple option agreement
- Often for a short period of time at a fixed price.
- The purchaser is under very few obligations to do anything other than to give notice when they want to proceed to purchase, if at all.
- Suitable if the seller has no concerns as to whether they want to sell and the seller does not mind that they would not be able to dispose of the property during the option period.
Land development, sale or purchase under promotion agreement
- An option taken by a party who is looking to add value to the land by obtaining planning permission, but not intending to purchase the land themselves. The Promoter and the purchaser is looking to buy strategically for future development potential.
- The Promoter will fund and take the risk of obtaining the planning permission.
- The Promoter’s costs will be only be payable on the sale and the Promoter will be entitled to a percentage of the sale price for the risks taken.
- The Promoter will normally be under an obligation to obtain planning permission and will be required to do so within the option period.
- More often than not the purchase price is agreed or determined following the grant of the planning permission by reference to market value or following a disposal marketing campaign.
- The option is used where the land is not in an area allocated for development under the local planning policy but the Promoter expects that a purchaser is looking to buy land for strategic reasons for future development potential.
Land development, sale or purchase under hybrid option agreement
- Unlike the simple option agreement this type of agreement will place the purchaser under various obligations (to avoid the land being “sterilised” from the market allowing the purchaser to obtain planning permission on a nearby site).
- Similar to the conditional contract, this agreement could provide for the purchaser to set out what they would regard as an unacceptable planning condition.
- Purchaser’s activities are monitored by the seller’s representatives at the purchaser’s costs.
As mentioned above the agents will usually advise on the commercial terms but all of the above agreements could include other terms that might be relative and by way of example, these may include the following:
- Is the purchaser entitled to take part only of the land for sale?
- Should there be a minimum price?
- Can the sellers suspend the timetable for completing for tax reasons?
- Should there be overage terms to cover future amendments to any planning permission or new planning permission obtained.
- Should the purchaser have the ability to be able to assign the agreement.
- Should the purchaser be under an obligation to pursue a planning appeal on any planning decision.
- If the seller is retaining land, is there an ability for the seller to object to any planning conditions.
- Are there any provisions for the seller and any lender to enter into planning agreements to facilitate the grant of planning permission?
- Should the option period be extended to allow for pending planning permissions to be determined.
- Should the purchaser be prohibited from submitting a competing planning application for land within a specified radius of the property subject to the sale option.
- What periods of time should there be for giving of notice to trigger the option or unconditionality of any conditional contract, for determining the price and completing the transaction?
- What assumptions should there be in determining Market Value.
- What deductions can be made before sale proceeds are distributed.
- Who is responsible for professional costs?
- What happens if third party land is needed to implement the planning permission.
- How are disputes determined.
- Is access for surveys to be carried out required.
The above list is not exhaustive and most of these terms will be considered by those negotiating the Heads of Terms, which will determine which is the most appropriate agreement that the parties should enter into.
For more information or an informal chat about how we can support you through a land sale or purchase, please contact David Ashton e. firstname.lastname@example.org t. 01825 745 366