Following my first article ‘Starting on the right foot: First steps in property development’ which looked at the important considerations from a legal point of view when a landowner and a developer are centred on a plot of land. My next instalment focuses on what happens next.
You have the land, what next?
The developer has found the land with development potential into which they consider investing time and money. The land may have been introduced to it by a land agent or otherwise identified through research of its own. This is the opportunity to risk its investment for a significant reward if successful in achieving an economically viable planning permission allowing development.
Along with the land comes an owner. Owners come in all shapes and sizes, but you need one that is at least interested in what the developer proposes and is prepared to tie up their land for a reasonable period of time in this venture. If a land agent is involved, then that commitment is already proved. The agent will be experienced in assessing whatever proposal is tabled by the developer and will negotiate more detailed terms. Successful deals can be struck without the involvement of an agent where solicitors experienced in property development are engaged by the landowner. If valuation advice is needed, then the solicitor can refer the matter to a valuer for an assessment of any offer.
Let’s say that we have some agreement in principle between the owner and the developer. Their interests are aligned but we are some ways from entering into a contract to make the arrangement legally binding. However, both parties need to be making their own commitments to expenditure to get to the point of exchanging contracts. The owner will need to engage a solicitor to represent them. Their solicitor will have two main jobs first being providing evidence of the title to the land and answering enquiries about it and the second is to negotiate the final detailed terms of the contract to be made with the developer. The developer too will appoint its solicitor who will investigate the owners title, put in searches of various central registers recording information about the land and its history, raise enquiries and draft and negotiate the contract. In addition, the developer may want to engage other consultants at this time to consider the technicalities around the development of the land to ensure that it has a good idea of any issues it might have to overcome. It will use its own time and experience to assess what pre-planning work it should carry out and in more detail the planning application it should best submit. You will see that there is a lot going on and cost being incurred from the outset.
How can you protect yourself until the exchange of contracts?
It is the case that until there is an exchange of contracts neither party is bound to the other, so what can either side do to protect themselves from lost opportunity and wasted time and cost? For the owner, it might be that the developer could be persuaded to underwrite some of the legal costs that the owner is to incur. This can be secured by way of a costs undertaking from one solicitor to another. This does add an even greater cost burden and risk on the developer. What is to stop the owner seeing if there is another developer out there willing to improve on the deal on the table, even if it has been agreed in principle? The parties can enter into an exclusivity agreement. That is an agreement which usually stops the owner speaking to any other party in return for a commitment from the developer to proceed with its pre-contract work. It should give the developer sufficient time to get its ducks in a row and to satisfy itself that the project is viable before contracting to proceed. In that time the solicitors will have concluded their work and have agreed on the full terms of the contract.
Exclusivity agreement
The one thing that an exclusivity agreement does not do is bind either party to proceed with the deal at the end of the exclusivity period. To many this seems unsatisfactory but if both sides have stayed true to their obligations under the exclusivity agreement, and the land prospects and the contractual terms still make sense, it should be to the benefit of both that they then proceed to an exchange of contracts.
My next articles will look in more detail at the types of contract that are usually used between an owner and developer, their advantages and disadvantages.
If you have a prospective development opportunity and would like to discuss this with a legal adviser, please contact a member of our Development team on development@stephens-scown.co.uk or 01872 265100.
In the next article I look at price and risk including conditional contracts.