With the Government seeking to build 300,000 new homes per year across the country, landowners and developers alike are looking to promote more sites for residential development. There is a notable lack of supply of suitable sites at present, with strong demand from house builders and promotion companies across the South East.
How best to tap into this market? Even when dealing with a straightforward planning application the costs involved in securing a planning consent can be expensive.
If the immediate prospect for development is less certain for a larger scheme or is a longer-term prospect, a gradual approach of promoting the site through the local development plan often has to be taken. Once formally allocated this is then followed with a formal planning application. More in-depth work on the myriad issues then has to be addressed in any such case, ranging from environmental studies to highways analysis.
In many instances landowners are looking to minimise the risk and the cost of this exercise by reaching an agreement with a developer or promoter as well as using the experience and knowledge of a development partner. Batcheller Monkhouse is currently working with over 50 landowners in the promotion of their agricultural land for development. This is normally under the terms of either an option agreement or more commonly a promotion agreement.
House builder or promotion company?
Under an option agreement, the landowner typically gives the developer the right to buy the land, either at a fixed price or by reference to a formula such as a percentage of market value on the grant of planning. The developer will typically pay an option fee on signing the agreement, and then take on the costs and responsibility of securing a suitable planning consent.
Under a promotion agreement a specialist land promoter would be instructed to pursue a suitable planning permission and would cover the costs of the process. Crucially the promoter does not have the right to buy the land once planning has been obtained. Instead, it would be marketed for sale by the owner on the open market with the promoter entitled to a set percentage of the sale proceeds together with agreed costs as and when the land is sold.
6 Key requirements to securing best value
The Market Value will be determined at the time that planning permission is obtained and so we need to protect against a drop in future land values by:
- Inserting a minimum land value clause into the agreement. However, attention needs to be paid to how this figure is determined. Often developers will wish to agree this on a net developable acreage basis, which will significantly reduce the acreage of the site and therefore the value of the site.
- In most cases planning and promotion costs will be deducted from the Market Value of the site. However, there can be significant costs associated with obtaining a planning permission and therefore a suitable cap should be set at the outset.
- Setting a minimum number of units or minimum housing density in the agreement is a useful tool to ensure that the developer is maximising the value of the site, to the owner’s advantage.
- The order that items will be deducted from the open Market Value should be agreed in advance. If the developer’s share is say 15% then whether this is deducted from the gross value or net value after costs will make a significant difference to the financial return to the landowner.
- The method of assessing development value must be agreed in advance, preferably relying on both comparable land transactions and fully costed residual valuations. In the case of the latter it is essential that the house builder is required to provide full data and costings on the scheme.
- Recoverable costs and professional fees should also be subject to a cap. Once planning permission has been obtained, any legal or surveying fees that were incurred by the landowner prior to the signing of the agreement will be payable. If the housing development never obtains planning, then the house builder will be responsible for paying these fees and the landowner will not be out of pocket. If there is a suitable cap on fees before the signing of the agreement, then the landowner can ensure that they know what all the deductions will be at the conclusion of the project.
Selling the development site on the open market is a major advantage of a promotion agreement as both the land promoter and the landowner are incentivised to maximise the sale price. In one case, where Batcheller Monkhouse sold two thirds of a large scheme on the open market, our clients received 25% more per acre than the owners of the other part of the site whose land was acquired by a house builder under an option agreement.
Securing the right terms
The structure of any agreement can vary significantly and we are frequently being called in to advise on poorly worded agreements once the planning permission has already been obtained. In these circumstances it is our role to negotiate the open market value for the site. However, an agreement can allow for significant deductions to be made from the site value. A poorly worded agreement can create significant uncertainty and make the task of agreeing the value almost impossible. Given that an option agreement can run for a 15 to 20-year period, how do we go about guaranteeing our client a degree of certainty concerning the amount received once planning has been obtained?
Who protects the interests of the landowner?
Schemes often run for up to 10 to 15 years, so how does the landowner ensure that the developer is progressing with the planning promotion and application diligently? We always recommend that the landowner retains an independent planning and development consultant; a role we routinely undertake and are greatly experienced in. The landowner’s consultant’s duty is to monitor process, to engage in the design and progression of the scheme and to ensure that the developer is meeting all necessary planning targets. This is in both parties’ best interests as it ensures that, other than the inevitable discussions on value, there are no disagreements and both parties are happy with the final outcome. Fees for the consultant need to be negotiated as part of the agreement, as they should be payable by the developer. This is an essential part of our role in any such project.
An overage clause is an additional piece of security in any agreement, ensuring that the landowner benefits from any future planning application on the site. Say a house builder has made a successful planning application for 150 units and the landowner sells them the site at the agreed price. The landowner does not want to find that the house builder has submitted a second application for an additional 50 units on the same site and the landowner has had no benefit from this.
Time for action
Most planning authorities are struggling to identify, allocate and deliver a sufficient amount of land to meet Government targets. At last, however, after years of prevarication, more rigorous steps are being taken. One is tempted to wonder whether this is as a direct response to the increasingly vocal statements from The Rt Hon Sanjid Javed MP, Secretary of State responsible for housing and planning.
Now is the time to act. With the right form of agreement and professional engagement throughout, landowners should reap the dividends of a successful conclusion to the planning process and best value on the open market.
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The final piece of the jigsaw
The successful delivery of new homes can be a long and complex process. We first reported on our role in forming a consortium of land owners for a large residential development at Tenterden in the 2013 edition of Rural Outlook. We were then engaged in the planning process, with consent eventually secured for 250 dwellings. These houses are now being built and our New Homes team is working with the housebuilder in the sale of the finished article.
The Batcheller Monkhouse Land and New Homes Department provides a specialist and focused service to our developer clients throughout the South East. The team is run by Julie Carver. She has 28 years’ experience in the housing industry, including 15 years dedicated to New Homes throughout the South East. The team works closely with our planning and development teams to maximise the potential from sites from as few as a single dwelling up to our largest current site of over 1,000 dwellings.
Our expertise and local knowledge, often engaged in sites from the very beginning, means that we provide advice from the very early stages, right through to the launch of the new development. Through our extensive market research we are able to advise on pricing, demand and specification, enabling an informed decision before a site is acquired to ensure maximum return for both developer and landowner.
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