What are the land purchase options for housebuilders and developers?
Purchase without planning permission
This is the most straightforward and quickest means by which a developer might acquire land to develop. 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 the future. The overage payment ensures that the land owner shares in the substantial increase in the value of the land once planning permission has been granted.
Many developers will not be able or willing to take the risk of buying land without planning permission 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 developer will use its expertise to pursue planning permission for the proposed development and the sale will only proceed if planning permission is granted. This does mean that the sale process is likely to take longer as the planning process 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 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.
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.
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 a 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 by the developer in securing planning permission.
Under a promotion agreement, the promoter will take responsibility for pursuing planning permission for the proposed development of the land. However, if the planning permission is secured, the promotor 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.
Every potential development site is different and bespoke agreements, perhaps involving combinations of all of the above mechanisms, are often required.
For further information please contact Lupton Fawcett’s specialist housebuilding team.
Rob Cooke is a Director specialising in house builder property disputes.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.