09 April 2019 #Commercial Real Estate
We are often asked by landowners what the best way is to fully realise the development value of their property where there is a possibility of planning permission being granted. What needs to be done to unlock the development potential and then obtain the maximum amount of the uplift in value on the subsequent sale of the property to developers?
There are many different factors that need to be considered in making a well-informed decision as to how to correctly structure the process in the best interests of the landowner. Right from the outset, whether the process is initiated by the landowner, an agent or developer making an approach, through to completion of the sale of the development site , the focus must be to ensure that the landowner receives a fair return or share of the sale proceeds instead of selling the property at less than its full value which will only enhance the developer’s profit from the transaction.
It is very important to meet with your legal advisor who is an expert in this area as early as possible when the process is being considered. The adviser should be experienced in negotiating and documenting terms agreed or still to be agreed and will be able to recommend those key professional advisers (including valuers & surveyors, planning consultants, architects, funders and tax planners) whose advice is likely to be required to safeguard the land owner’s position on the development project.
On occasion, developers take the initiative and identify land with potential for a residential, commercial or mixed-use scheme development. They will or may want to present to a possibly inexperienced landowner their own form of agreement using their own standard terms which is likely be drafted heavily in their favour. It is sensible to obtain full legal advice before entering into a contractual commitment of this nature. An experienced legal adviser will be able to ensure that the landowner’s interests are fully protected.
There is a range of different types of contractual arrangement that can be used. These include:
(i) to take certain actions (as opposed to maybe keeping the property in its land bank)
(ii) to submit a planning application for a specified scheme of development on the property by a certain date
(iii) to actively pursue the grant of planning permission (including appealing any refusal where there are good prospects of success) and
(iv) to complete its due diligence, site investigations and funding commitments so that on the grant of planning that is ‘satisfactory’ to the parties (with the agreement defining what would be an “ unsatisfactory” consent) the contract goes unconditional and the property is sold at a price which reflects the value of the land with the benefit of the planning actually obtained.
Further protection for the landowner would include measures entitling the landowner to a share (or clawback) of any increased value if the developer either (a) sells the site on to another developer at an increased price or (b) subsequently (within 5/10 years) seeks planning for, obtains and builds out a better, more valuable scheme of development on the land.
Increasingly, landowners are looking for more involvement in the process by working more collaboratively with a development partner, but will not want to take on the risks and significant time & costs outlays required to properly promote their land through the local development plan framework and submit a planning application at the optimum time. The answer to this may be the use of a Land Promotion Agreement.
A Land Promotion Agreement (“LPA”) can be used to engage a ‘promoter’ (whether a developer or a specialist planning agent who has a track record of success) to actively promote the land for development, appoint all the required consultants to prepare necessary reports in support and lodge a planning application. The document will include a positive commitment for the promoter to incur the cost of achieving the first key objective which is of course the grant of planning permission in accordance with an agreed planning strategy. Following success with planning, the parties will work together to satisfy the second key objective which is the sale of the land in the open market to a third party developer (with the benefit of planning) together with a disposal strategy prepared between and agreed upon by both parties.
In return for the work undertaken and expenses incurred by the promoter at its own risk (given that if permission is not obtained by the agreed longstop date, the agreement will terminate without the promoter’s costs being reimbursed) the promoter receives his payment and reward when the land is sold (with the promoter being reimbursed for expenses on planning and marketing from the gross sale proceeds and the landowner rewarding him for his success with a share (whether a percentage or proportionate fee ) of the net sale proceeds .
A well drafted LPA should give the landowner involvement (for example, whether the landowner wants to lead on and direct the marketing campaign), a right to consultation and exposure to risk at a level acceptable to the landowner. Importantly, it offers to the landowner the reassurance that the property will be exposed fully to the market thus ensuring the best price is obtained on disposal. The LPA should reduce the scope of a dispute or falling out of the parties during the duration of the contractual relationship as both parties are incentivised by the same goal of sharing the maximum end receipt.
There is no fixed arrangement that must be used when contractually partnering a landowner with a developer / promoter, often for a considerable period (during which the landowner will be unable to sell the property other than subject to the agreement). The location of the land (in town, edge of urban or rural), size of plot and status (greenfield or brown land) will all have an impact on the terms agreed and it may be that some ‘hybrid’ form of agreement (taking features from some or all of the agreements mentioned) is required in the particular case. The merits and drawbacks (legal, practical and financial) should be fully discussed and evaluated before embarking on a strategic land transaction, especially in a relatively difficult economic climate and challenging market, with government policy and local authority targets demanding the supply of new homes.