So you’ve taken the momentous decision to turn over some of your farmland for housing. This may be a once-in-a-generation opportunity to generate a significant amount of capital, but one wrong step could see you get clobbered for tax or fleeced by an unscrupulous property developer. How can you capitalise on the opportunity and at the same time safeguard your inheritance?
What we’re really talking about here is which route to take – Option agreement or Promotion agreement. As with most things, there is no right or wrong answer – it will depend on your particular circumstances. Let’s start by looking at the differences between the two types of agreement:
Option agreement
In this model, the developer makes an initial upfront payment and takes on all the risks – and costs – of submitting the planning application. (Agreed costs are deducted from the landowner’s share of the eventual sale). In return, once permission has been granted the developer has first refusal to purchase the site on the basis of pre-agreed terms.
If you were developing the site yourself you might typically need to fund up to £500,000 to cover professional fees and various survey costs (archaeological, ecological, travel plans and so on) to develop a large site of one hundred or more units. Few landowners would be willing to commit to that level of outlay without a guarantee of planning permission, which is why, historically, Option agreements have tended to be the preferred route.
For the landowner, these arrangements have the benefits of being:
- Low risk – the developer bears the initial costs
- Hands-off – relies on the developer’s experience and contacts
- Predictable – a minimum land value can be set at the start of the project so you have the security of knowing the worst case scenario
- Long-term – developers are generally more willing to take a longer term approach to sites than land promoters
However, there can be many pitfalls to trip the unwary, the three biggest being:
- Poorly drafted agreements containing ambiguities that can cause legal problems down the line
- Spiralling planning costs if they are not expressly capped – we have seen these exceed £1.5 million
- The inherent conflict of interests between landowner and developer who want two very different outcomes: the landowner’s primary concern being to secure the maximum land value for the site as swiftly as possible, whereas the developer’s goal is to buy the site at the lowest possible cost at a time to suit them.
Promotion agreement
For these reasons, Promotion agreements, which attempt to address the imbalance between landowner and developer, are now gaining in popularity. When you go down this path, a specialist land promoter is appointed who takes on responsibility for obtaining planning permission for the site. The land promoter bears all the risk and costs incurred in the planning process in return for an agreed percentage of the eventual sale price. We have worked with 20 such experienced and expert companies in the region.
The fundamental difference between an Option agreement and Promotion agreement is that with an Option agreement, once planning permission is obtained, the developer is entitled to buy the site at a pre-agreed price or agreed formula. Conversely, with a Promotion agreement, the site is put up for sale on the open market. This eliminates any disputes about its Market Value as this will be established by going through a full market exercise in which a number of parties will submit a bid for the site.
There is nothing like competition to bring the best result – only recently on a split development site the section of the site sold on the open market achieved a price of 30% higher on a per unit basis as compared to the section of the site purchased under an Option agreement.
Another major advantage of this model is that whereas an option agreement sets up a potential conflict between the two parties, with a Promotion agreement landowner and developer have avested interest in working together to achieve a common goal – securing the best possible price for the land.
Size does matter
At this juncture, we should mention that larger sites are currently more sought-after. The majority of Local Authorities do not have the five-year housing supply required by Central Government so are under considerable pressure to meet their housing targets. They are unlikely to get very excited by ten units.
Ensure you’re well positioned to take advantage of any offer. In practical terms this means:
• Good housekeeping – Tidy up the legal and physical aspects of the site as much as possible and ensure it has suitable access provisions
• Check it is correctly managed. If you have tenancies in place, make sure the necessary paperwork and licences are in place to allow you to recover vacant possession when required
• Know its value. Consult experts with knowledge of the local area for an accurate idea of current market prices.
Whichever route you decide to take, we can give you the benefit of our professional expertise in terms of the agreement wording to ensure there are no hidden traps and negotiate the best possible terms for you as landowner in the eventual contract. You are likely to be dealing with sizeable sums so if the developer’s share is agreed at 15% rather than the 20% originally demanded this will make a considerable difference. For this reason, it is crucial to invest in good advice at the start, both from Batcheller Monkhouse and a specialist property lawyer.
Case Study
Bringing a joint venture site to fruition Batcheller Monkhouse was instructed to act on behalf of the principal landowner on a site at Tenterden back in 2012 and quickly recognised that establishing a consortium of neighbouring landowners would make the site more commercially viable and appealing to the Local Authority. We then advised on drawing up a joint venture agreement between the various landowners and appointment of a land promoter following a competitive tender. We also assisted the landowners in the preparation of a collaboration agreement with a housebuilder who had purchased the neighbouring development site.
Gaining planning permission was a significant achievement as the picturesque town of Tenterden has not experienced high levels of development in recent times and residents were understandably apprehensive about the impact of the proposed scheme on the town. Consequently, we worked with local residents’ associations, Local Authority officers and concerned residents to share details of the plans and demonstrate that the development would be beneficial to the town, rather than a blight. Following a successful planning application in 2015, permission was granted for 138 thoughtfully-designed units across the 15 acre site. Batcheller Monkhouse was then retained to market the site and have subsequently sold the attractive development to a national housebuilder.
