Housing development opportunity calls for robust agreements

With government keen to promote economic recovery through support for the housing market and amendments to planning policies, landowners may be able to benefit from planning permission for housing. Peter Moore explains some of the key issues for landowners

Housebuilders are responding to government policies by trying to secure development land to meet the increasing demand in the housing market.

Most of the activity is from the large housebuilders and promoters because the smaller operators are not so well supported by the banks. Sites of 25 to 200 houses are most likely to be developed at present.

Following the introduction of the coalition National Planning Policy Framework in March 2012, developers are most active where there are short term opportunities – typically in areas where the local planning authority is unable to fulfil its obligation to deliver a five-year supply of housing land.

In these areas, developers are able to submit speculative applications on development sites outside settlement boundaries which would normally be contrary to the Local Development Plan. Applications pursued under these policies are costly and often need to be taken to appeal.

In the current planning environment, where the time allowed to submit planning applications can be short, acting quickly is very important.

However, getting the agreement structured correctly and ensuring all options are considered is also crucial.

Landowners who have sites suitable for residential development have a number of alternatives available to them, but sometimes the need to act quickly and the high-risk nature of five-year land supply applications, means working with a developer may be most appropriate.

For those considering entering into an agreement with a third-party developer there are a number of key considerations:

Work with house builder or promoter?

House builders typically favour option agreements which enable them to purchase the land at an agreed percentage of market value, following the grant of planning permission.

In contrast, promoters will usually look to enter into promotion agreements, which provide for a payment to the promoter based upon a percentage share of the sale price achieved when the land is sold on the open market with the benefit of planning permission.

In both situations the house builder or promoter takes the cost and risk of securing a planning permission, but the key difference can be the value achieved by the landowner.

The values through a promotion agreement are based upon the actual sale price achieved in the open market while the value through an option agreement with a builder is based upon a theoretical valuation exercise.

Choose the right partner

It is essential to choose the right partner with the necessary financial standing, planning/technical ability and track record (ideally in the same local authority area).

Check the credit and track record of those you are working with – talk to other landowners and agents they have worked with to find out how they operate.

Pursuing planning applications for medium-to-large development sites of 40 to 1,000 houses can be a costly and involved process and the sites need to be technically viable as well gaining planning permission.

Developers usually put together a project team of specialist consultants to work on applications and it is worth checking that the consultants involved also have the necessary skills and experience.

Legal agreements

Both option agreements and promotion agreements should be carefully drafted based on a comprehensive schedule of agreed terms. A solicitor and agent should work together to ensure the landowner’s position is protected whilst still maintaining the commercial viability of the scheme.

Option agreements usually run for two to three years with the option to extend them to five years. An up-front payment of £10,000 to £100,000, known as an option fee, is common at the point the agreement is signed and these fees are currently firming. [who pays whom?]

The terms in the market are continually developing and different developers have different criteria, so terms will vary.

However, some key areas of protection for the landowner should be included in option and promotion agreements:

Minimum price provision. This ensures the land is not sold below an agreed figure. It can be expressed as a figure per gross acre or a figure per net developable acre and it is important to be aware of the distinction.

Planning obligations on the developer: These should include time limits on the submission of applications and submission of applications in joint names to safeguard the landowner’s position if the agreement comes to an end with a live application running.

Landowners should also be able to have input on the developer’s approach to planning strateg, including prior approval of all applications and involvement in negotiations with local authorities on any planning gain payments.

The agreement should also be capable of termination if the developer is not performing; for example, if your land is not being promoted sufficiently.

The terms should allow you to bring the agreement to an end if there is no good explanation for lack of progress.

Cap on promotion costs. Some house builders and promoters will seek to recover promotion costs on the disposal of the land. These should be capped to prevent costs escalating.

Taxation. It is essential that an experienced accountant is on board in the early stages to manage the tax burden through reliefs and structures. There are important implications for Inheritance Tax planning and Capital Gains Tax mitigation. Also, VAT can be an issue for promotion agreements and this needs careful consideration.

The timing of payments and issues around when value is created also need careful management.

Peter Moore works for Bletsoes’ planning and development team based at Thrapston, Northamptonshire.

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