In the second of two articles, Commercial Property expert, Simon Stempien looks at two further property development options available for landowners who have land capable of being developed.
We have acted for numerous Land owners and Developers and can help with any size of development. Whether you have space for a single dwelling, whether you and neighbours want to work together to see what is possible, or whether you have a number of acres, we can help. Following on from our earlier discussion on Option Agreements and Contracts Subject to Planning we now turn to two further property contracts often used when there is the potential for development, Promotion Agreements and Overage. We will also mention a few other general factors to consider when development is possible.
Promotion Agreements are a relatively new form of agreements for developments but can offer a number of benefits for all parties. At its core, a Promotion Agreement is an agreement between a Land Owner and a Promotor for the Promotor to use its expertise to obtain planning permission and to sell the Property for the Current Owner. Therefore a Promotion Agreement tends to be a collaborative agreement between the Current Owner and the Promotor. The Current Owner is ‘investing’ the Land and the Promotor is ‘investing’ its knowledge, expertise and its own money whilst planning is obtained.
Once a Buyer is found the Land will need to be sold. Given neither the final sale price nor the exact Planning Permission is known at the start of the Agreement the Promotion Agreement can protect the Current Owner by stating minimum sale prices per acre. Other structures can also be agreed to ensure that the Current Owner obtains a minimum sale price. However, given both parties are working together it is in both of their interests that the best price is found and the normal adversarial negotiations to limit the sale price do not occur. The Promotor, however, may want to include a restriction on the Seller from selling to a third party as a way to avoid paying any promotion costs.
The Promotion Agreement will then set out how the balance of the sale price will be divided. For example, the Promotor may obtain 10% or 20% of the balance of the sale proceeds for its work and the Current Owner keeps the rest. Whilst the Promotor’s share may seem high, the Current Owner was able to sell its Property for significantly more than the value of the Land without Planning Permission and they did not have to become deeply involved with the planning process. This split is on the ‘balance’ of the sale price, i.e. once costs and expenses have been deducted by the Promotor, as the Promotor will want to recover all of its costs to obtain the Planning Permission and to help sell the Property.
The real benefit of a Promotion Agreement comes in larger scale developments. Promotion Agreements can involve a number of property owners and therefore the schemes being promoted can be for hundreds of properties with a total value of millions of pounds. Even if a Current Owner only has a small section of land, they may be the ‘gateway’ property to the rest of the development and therefore may obtain a significantly higher sale price than if it was acting alone.
Promotion Agreements are not simple and in larger developments sales may take place in tranches, and depending on how the payments are structured, the Current Owner may find that it receives funds at the very end of the process whilst other owners have been paid a number of years before. The bigger the development the higher the likelihood that more parties are involved, the more complex the procedure and the longer the period until the eventual sale. Promotion Agreements can therefore take years even if there is constant activity. The general housing market may also change in that period and the initial expectations and hopes of the Parties may not be met.
Kent has a number of excellent Land Agents who can act as promotor and we have worked with a number.
An overage agreement is a promise by the Developer to pay further money to the Original Owner (an ‘uplift’) in the future if certain 'triggers' conditions occur. By way of an example, an owner may sell a property for a certain amount as the planning sought was only for 3 properties. After completion and against the odds, the Developer manages to get planning for 5 properties and the value of the land is now much higher than it was when only 3 properties were permitted. If an Overage agreement was in place, there may be a formula to state that an ‘uplift’ on the original purchase price needs to be paid to the original owner (e.g. £20,000 per additional property over 3 properties). An overage can be even more general, with any change triggering an additional payment being a percentage of the original purchase price (e.g., an additional 50% payment whether 1 or 10 additional Properties are built).
Overages are therefore more beneficial for Original Owners than Developers as the Developer may be asked to pay even more money in the future. That being said, the piece of Land in question may be very desirable to a number of developers and an offer of an Overage may tip an offer in a Developer’s favour.
Overages can ‘burden’ a piece of Land for a long time. We have drafted a number of overages with 25 year or longer periods. This means that the future development plans of a piece of land can be affected for a significant period.
A word of warning is that Overages need to be very carefully planned and all conditions need to be considered. If the Overage states that a further payment is needed if further residential units are developed, it would not trigger if commercial units are built. This is a very broad example but overages should not be considered a guarantee of future payment as a Developer may structure its future plans specifically to avoid a trigger. We have seen Developers specifically delay plans to develop for a number of years to avoid triggering an Overage.
We work extensively with Charities and Overages are an excellent way to protect the Trustees and the Charity itself when they sell land. Charities have a duty to get the best return for assets possible and Overages are one means in which a Charity can ensure that any ‘missed opportunity’ is not lost.
We cannot advise on what the terms of the overage should be and you should seek specialist advice from Land Agents to discuss the potential value differences.
Some final thoughts
Restrictive Covenants, Access & Easements
Obtaining planning permission may not be the only bar to development, and so we would advise you to instruct a Solicitor to review your title as a first step so as to determine whether there are any restrictive covenants that prohibit development, if the property has the necessary access to the public highway and the ability to connect to services such as water and electricity.
Obtain Planning yourself
If you feel confident enough and have professionals you trust, you may look to obtain planning permission on your own. The benefit of this approach is that the other forms tend to look to purchase at a lesser amount due to the effort, expense and risk that the Developer contributes without certainty of Planning Permission. When planning permission is granted, land is worth more than when no permission is obtained.
However, by obtaining a Planning Permission the potential pool of purchasers may not find the permission or scheme obtained desirable. That being said, the fact that Planning Permission was obtained often shows that development in the area is possible and even if a developer did not like what has been obtained, if they see potential in the site they may be more willing to proceed given they know the Council do see the site as having development potential.
Rights in documents
Please also note if Planning Permission is obtained by someone else on your land but for whatever reason the purchase does not complete, that Planning Permission still attaches to the Land. That means it remains valid even if the purchase does not complete. The issue for an owner is that the copyright in the plans and drawings used to obtain that Planning belongs to the person who obtained them. We therefore advice in any contract that it clearly states that the right to use those documents pass to the property owner if the Developer does not complete the purchase.
For advice on this and other commercial property issues, please contact one of our Commercial Property specialists who will be happy to help.
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