There is increasing national pressure for housing with potentially big rewards for landowners. But knowing what to look out for if a developer comes knocking is critical.
Imagine a developer who knocks on your door, offers to take forward your land for development and then starts pulling out huge and tempting figures, like rabbits from a hat. Beware – like all magicians he may be using more than a little sleight of hand.
What to consider before selling development land
Developers are often pushy; they are usually trying to pressure you into agreeing and signing possibly unreasonable terms to play the game by their rules.
You need a crack team to ensure you get the best possible deal. This requires an agent, solicitor and tax adviser, all of who deal with development land on a daily basis.
This team will ensure that your agent’s agreed “heads of terms” set out what is fair and necessary to be covered; the solicitor then ensures this is not biased towards the developer in the fine detail; finally, all must be planned to minimise your tax bill.
Your agent will advise on your correct share of the ultimate open market value of the land with planning consent (the “headline figure”) – usually between 85% and 95% of the value of the land.
The developer will keep the remaining 5-15% to cover the costs of their efforts to obtain planning consent, depending on the size and complexity/cost of achieving consent on your site.
Further additional deductions that the developer will try to agree are usually referred to as “abnormal costs”.
These are the costs that a clean and fully serviced block of land (with water, electricity, sewers) could be expected to have, with no additional requirement for expensive extra costs such as foundations to cater for poor ground conditions.
Clawback and overage on any future planning consent or sales-on must be included in the agreement and should be shared with the landowner.
Typical tricks of developers
Often, where there is the likelihood of development, developers will try to get several landowners to agree “options” on a number of sites.
An option ties the landowner into selling their land if the developer is granted planning permission and prevents the owner taking the land forward for development if the developer wants to promote another site.
If a developer manages to agree options on several potential sites in an area, all other developers are effectively locked out. The developer will then spend their time and effort promoting just the land they believe is the most likely to succeed.
Landowners can lose out in this way, so make sure the terms in your options contract prevent the developer promoting other competing land within a disproportionate distance.
The developer wants to buy at the lowest price. Ensure that if, following a planning consent, the market drops (as it did in 2007), you are not forced to sell at a low or even giveaway price. Insert a minimum-price clause that stops the developer from buying below that figure.
Ensure that your land is assessed on the open market value and not just a residual value, which would be calculated on the basis of taking the estimated final selling price of the houses, less all the costs of planning, construction, abnormals and costs imposed by the local planning authority.
Developers love to use the residual method. It involves huge sums with great opportunity for reduction of land value.
When planning consent is achieved, be prepared for price negotiations.
The developer will try to minimise the price and it is up to your agent, possibly with a civil engineer, to argue the case for either reducing costs, particularly the “abnormal” ones, if they apply to your site, or even arguing a more cost-effective construction form.
Price will also depend on the net size of the site. The developer will invariably try to exclude as much land as possible on the grounds that it is for “community facilities or infrastructure”. This may need to be argued.
Selling land to a developer can be highly lucrative and is increasingly attractive to many farmers.
However, it is the case that too many farmers end up feeling unfairly treated by the planning process, the developer – or both.
It is a complicated business and not one to be tackled half-heartedly. Lack of understanding of the issues involved will be punished heavily, so invest in experienced and well-informed advice.
The consequences if you don’t can be very disappointing or even disastrous. But, properly prepared and planned, it can be that wonderful opportunity in a working lifetime.