Selling Land for Development

Business : Commercial Property

Selling Land for Development

You may get only one chance to sell your land so you need to ensure you adopt the right process. There are various ways in which you can agree the deal with your buyer and we have outlined the most common ones.

What is a conditional contract?

As the name indicates this is a form of contract which means the land sale will only be completed if certain conditions are met. The most common is the buyer obtaining satisfactory planning permission to enable them to develop the land, if planning is not granted they do not need to proceed.

As a seller you should be aware that the land may not be sold if the conditions are not met or waived by the buyer as this is their decision. On this basis you may want to include an obligation on the buyer to appeal the planning decision if it is not granted.

What is an option agreement?

An option allows the buyer a certain period of time during which they can decide whether they want to buy the land. Usually the buyer pays a non-refundable option fee to the seller; this can be regarded as a form of compensation for tying up the land during the option period, which the seller will keep whether or not the buyer exercises the option.

The purchase price is calculated once planning permission is granted as it is easier to work out the value at this point. On completion of the sale, sometimes the initial payment is deducted from the balance of the purchase price paid by the buyer.

What is the difference between a conditional contract and an option agreement?

Under a conditional contract there is a binding agreement for the sale and purchase of the land. This has a significance as it is the trigger date for Capital Gains Tax purposes even if the sale does not take place for some years. The contract is conditional on the buyer satisfying the condition (usually obtaining planning permission). The seller will want to ensure that the buyer does all it can to obtain the most valuable planning permission as soon as possible.

An option agreement is just that; an option for the buyer to buy the land. There is no binding land sale contract as such. The buyer could decide not to take up the option, even if it were successful in obtaining planning permission.

What is a promotion agreement?

This is an agreement between landowner and promoter and has become increasingly popular in recent years. They have similarities to a conditional contract, however the promoter will usually not be the buyer of the land.

They work on the basis that the promoter obtains the planning permission at its risk and cost. The land is then put up for sale and when sold, the proceeds are divided between the developer and the landowner in agreed proportions. On larger schemes, there could be two or three housebuilders involved in the purchase.

Under a conditional contract or option agreement the price the developer pays for the land usually has to be agreed between the parties once planning permission has been obtained. There can be disagreement about this and there has to be a mechanism for the price to be fixed by an independent third party surveyor if the parties cannot agree it. Under a promotion agreement the land will be sold on the open market for the “going rate”, so avoiding disputes between the parties over price.

What is a collaboration agreement?

Sometimes called a joint venture agreement it brings together two or more landowners often with a developer or promoter. It is most helpful if there are several adjoining plots too small to develop individually as it may create a more viable site and helps to share the infrastructure and planning costs.

Impact of Community Infrastructure Levy

Community Infrastructure Levy (CIL) came into force in 2010 as a tool for local authorities to get help in delivering infrastructure to support the development of their area and is payable on the start of the development. The liability to pay CIL is with the party submitting the assumption of liability notice. However in the absence of a notice, CIL liability runs with the ownership of land. This should be carefully considered when preparing the development agreements as it is essential to be clear as to the parties’ liabilities.

Protecting your interests

If you are looking to develop your land or have been approached by a developer or promoter, please contact us so that we can ensure that whichever form of development agreement is tailored to suit your requirements.

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