In these times of political and economic uncertainty, the housebuilding industry – like many others – faces significant challenges. Yet one thing remains certain: Scotland needs more houses. With a growing and aging population, and with more people choosing to live alone, the number of households in Scotland is expected to increase by 500,000 over the next 20 years. If we are to come anywhere close to meeting housebuilding targets, more land will need to be acquired for development.
From the landowner’s perspective, the opportunity to sell land to a developer is often very welcome. The value of land suitable for residential development is significantly higher than for agricultural purposes, and a sale can provide a welcome cash boost to a farming business or an estate. But selling to a developer can be a very different ball game to a traditional sale and purchase. This article explains some of the different ways in which a sale to a housing developer might proceed.
Purchase without planning permission
This is the most straightforward and quickest means by which a developer might acquire land. The land will be purchased outright and before any planning permission for the proposed development is in place.
The downside for the landowner is that the upfront price will be comparatively low (perhaps based on the agricultural value of the land). However, it is usually agreed that there will be an uplift in price – normally referred to as an “overage payment” – if and when planning permission is granted in future. The overage payment ensures that the landowner shares in the substantial increase in the value of the land once planning permission has been granted. Needless to say, this could be very valuable to the landowner further down the line, and it is critical that the contract is carefully drafted to capture that value.
Many developers will not be able or willing to take the risk of buying land without planning permission (and other pre-requisites to development) being in place. For this reason, the purchase of land for development is often agreed on a conditional basis, meaning that the purchase will happen only if and when certain pre-conditions have been met.
Typically, the agreement will cover the following: the developer will use its expertise to pursue planning permission for the proposed development, and the sale will proceed only if planning permission is granted. Similar pre-conditions might be applied in relation to other relevant matters – such as carrying out site investigations or establishing that the site can be connected to essential services. All of this does mean that the sale process is likely to take longer – the planning process in particular can be notoriously slow.
Option to purchase
As an alternative to a conditional purchase, a developer might seek an option to purchase. This is used more frequently when there is less certainty that planning permission can be obtained for a site. Under an “option agreement”, the developer will usually pay an initial, non-refundable lump sum in order to secure the right to buy the land at some point in the future (up until an agreed deadline), and will then proceed to apply for planning permission and assess the suitability of the land for development. The key distinction, as compared with a conditional purchase, is that the developer is not committed to purchasing the land, even if planning permission is obtained and other development pre-requisites do fall into place.
Option agreements tend to be a longer term arrangement than a conditional purchase. The agreed option period is likely to be measured in years, and a 10-year option would not be uncommon. Any lump sum payment is negotiable and should at the very least cover the landowner’s costs for entering into the option agreement.
Given the length of time between signing the option agreement and the date any sale actually goes through, it is often the case that no fixed price is agreed at the outset. Instead, the price will usually be agreed as the market value of the land (with the benefit of planning permission) at the point the developer decides to go ahead with the purchase – but subject to a discount to reflect the cost and effort incurred by the developer in securing planning permission. If there is disagreement as to what the market value is, the issue will usually be determined by an independent valuer.
“Promotion agreements” are a relatively new phenomenon. Under a promotion agreement, the promoter will take responsibility for pursuing planning permission for the proposed development of the land. However, if planning permission is secured, the promoter will be obliged to advertise the site for sale on the open market so as to secure the best possible price. The promoter’s reward for its efforts in securing the planning permission and marketing the land is a share of the sale price received (plus costs incurred). It will usually also be left open to the promoter to make a bid for the land itself (which will then be considered beside all other bids received). Sometimes the promoter is allowed to purchase a proportion of the land for market value in a non-competitive situation.
The different mechanisms described above are some of the most common purchase mechanisms used by housebuilders. However, every potential development site is different, and bespoke agreements – perhaps involving combinations of these mechanisms – are often required. The devil is in the detail and, of course, it pays to involve solicitors and agents with plenty of experience of the sector to guide you through the process.