Fiona Gibson and Kriti Sherchan talk about what is classed as strategic land, some of the common issues and points to consider.
What is Strategic Land?
When Developers, Land Agents, Solicitors and Promotors refer to Strategic Land Agreements, they are usually referring to the following:
- Conditional Contract
- Promotion Agreement
- Option Agreement
- Collaboration Agreement
Strategic Land Agreements come in all shapes and sizes (the same as development projects) and there is no “one size fits all” approach. Whilst there are common issues that would apply to any Strategic Land project that a Land Owner, Agent, Solicitor and Accountant should be considering, there are also key differences in the types of documents and how they work.
- These tend to be used for (i) short term projects or (ii) small projects or (iii) larger projects where outline planning permission has been obtained but a Developer wants to obtain reserved matters or vary the planning permission before being committed to the purchase.
- A key difference between a Conditional Contract and an Option or a Promotion Agreement is that the Developer must buy the site if the planning permission, as they envisaged it, is obtained. Agreements will usually refer to a “satisfactory” planning permission and this will have very specific conditions that a Developer would want to ensure are met before they are obliged to purchase the site: if those conditions are met, then the Developer has no choice – they must buy.
- These can be very similar to a Conditional Contract in that the contract is with a Developer who plans to acquire the site; the difference is that an Option usually gives them the flexibility to buy the site or not. The flexibility will vary on a) what the planning permission is and whether it is acceptable to them and b) whether the Land Owner and the Developer can agree a price that they both accept.
- Some Options have set formulas agreed for fixing the price, but these are still open to interpretation and detailed discussion between the parties.
- If the Developer chooses not to buy, the Land Owner will still have the benefit of the planning permission which will enhance the value of their property which they would then be able to sell on the open market.
- These are entered in to with a Promoter (some of whom are also Developers), but a Promoter’s role is to obtain planning permission for the site and then market it on the open market to achieve the best price possible. The Promoter will be taking a share of the market value and so has an interest in the property potentially being sold at the highest value (as opposed to an Option Agreement where the Developer will want to pay the lowest price that they can argue within the terms of the Option Agreement).
- If planning permission is obtained, the Seller is obliged to market and sell the land to the party that the Promotor and the Land Owner agree, working collaboratively, is the best purchaser.
- It is possible to have a hybrid agreement where a Promoter obtains planning permission but chooses not to buy the land itself. They can then sell the property and still achieve a payment which will go some way to recovering the costs they may have spent in obtaining planning (which may be quite significant).
It is key to always consult with your Agent, Solicitor and Accountant as early as possible in the project to ensure that the initial Heads of Terms reflect the key objectives for the land owner and set out how these are going to be achieved.
Points to consider:
- Who will be the parties to the agreement? Who owns the land and how much involvement do they want? Is it all within family control, or will third parties need to be involved? How will the project be funded?
- If there is more than one legal entity (even within the same family or, for example, a company or trust) or a third party is involved, a Collaboration Agreement may be advisable. This will govern how all the parties will work together to achieve their entering into the Strategic Land Agreement.
- Is the development to be for commercial, residential or mixed use purposes?
- What are the timescales for development? Are there any phasing requirements?
- Minimum area/number of houses the developer is to get planning permission for.
- How to calculate the value: a fixed price subject to indexation or a formula based on a market value at the time?
- How long will the agreement be in place for? Is there the ability for a developer to extend it automatically, e.g. if there is a planning appeal at the end of the initial period? Or a more significant extension for a specific number of years (which may require a further payment from the developer).
- Do the proposals allow for flexibility for tax planning? Tax planning is important, consult your Accountant in the early stages and again when the documents are finally agreed as the original tax consequences can change due to changes in planning policy or taxation legislation during the course of the project.
- Is there any requirement for future overage if eg. the land is used for access to enable further land to be developed in 10 or 20 years.
- What access and service rights should be reserved for any adjoining land – whether for its current purposes or to enhance or preserve value for future development?
Whatever agreements are proposed to be entered in to, it is important to keep a flexible attitude: things will change, issues will arise that no one anticipated and the Developer and Land Owner and their respective Solicitors will then need to work together to resolve any issues and ensure that the final Agreement is satisfactory to all parties.