At this point we have a willing buyer (the Developer) and a willing seller (the owner). They like the look of each other, well enough to consider dealing, and the land is thought to have development potential. Subject to the usual checking of title and searches about the land’s history, environment, and third-party interests, why don’t they just exchange contracts? The owner can sell the land to the developer at an agreed price. Why not? Well, it’s all about risk.
An immediate sale requires the price to be agreed. What is stopping that is the value of the land is very uncertain as it has yet to received planning permission. The owner could take a pragmatic view, factor in the risk taken by the developer, and take what is on offer now. It would be way below the value of the land post planning but if the land fails to achieve consent, be more than the then market value. It is possible to guard the owner against future uplift in value after a straight pre-consent sale by way of an overage/clawback agreement (a topic for a later article) but pre-planning sales are uncommon.
It is possible to enter a contract early on which deals with the process of the developer getting a planning permission and once achieved, the price being calculated based upon the terms of the permission and the market value of the land at the time. This enables the parties to exchange contracts giving both sides the reassurance that if all goes well, there will be a sale to the developer and a way of working out the sale price. This is commonly known as a conditional contract.
Owing to the uncertainties around the planning process, a developer will want to be happy with the permission it gets and only be obliged to proceed to buy if it is satisfactory to it. The owner will want a procedure which gives them the right price based upon the value of the land with the satisfactory permission. The price can still be a set sum, eliminating the risk to the owner, but that is unusual. The owner, having waited for the planning process to conclude will want to enjoy a substantial part of the uplift in value. The price is more usually a percentage of the market value calculated at the time based upon the consent obtained, probably protected by a minimum return per consented acre.
What are the disadvantages of a conditional contract? These centre on what is to be regarded as a satisfactory planning permission and the calculation of the price. The developer will want as much freedom as it can negotiate to determine if a consent is satisfactory and is very unlikely to allow any contractual terms which could compel it to buy the land unless it was entirely happy at the time to proceed. In the absence of the price being fixed, any assessment of market value is bound to be an area where the interests of the owner and the developer are opposed and so likely to give rise to a strong difference of opinion, if not a dispute. Disputes are costly and lengthy to resolve and favour the party with deeper pockets.
Any such conditional contract needs to run for a set period. But long enough to allow for the planning process (including challenge and appeal). If there is no sale at the end of that, either because there is no planning permission or the consent is not what is needed to satisfy the condition, the parties should be able to walk away. The developer will have lost significant investment in the project and the lost opportunity of pursuing other areas of land. It might have picked up some of the owner’s legal and agents costs on the way as well. So, it won’t have been that easy a decision if it has chosen not to proceed. The owner might also be out of pocket and have tied up their land for a few years. If there is a planning permission at the end of the contract, then that permission attaches to the land and thus is with the owner. The contract can provide that the developer allows the owner to use the reports and certain intellectual property that goes with the consent so the owner can at least offer the land for sale with the planning permission to other developers.
In the next article I will look at options and how they work in property development. In my first article ‘Starting on the right foot: First steps in property development’ I looked at the important considerations from a legal point of view when a landowner and a developer are centred on a plot of land, and in the second instalment I focused on what happens next.