Development Agreements

Development Agreements in relation to strategic land is a term which is used to cover a variety of agreements between Landowners and Land Promoter or Housebuilder. Each agreement will, of course, require to be tailored to the parties and the circumstances of the particular area of strategic land, but they tend to have a number of elements in common. The main types of agreement are explained below:

Option Agreements

When considering an Option Agreement, the Landowner needs to understand that they will typically give the Land Promoter or Housebuilder a ‘right to buy’ the land. This can be at a fixed price or with the use of a formula to calculate the market value. The Land Promoter or Housebuilder will then usually take on a range of obligations which will be specified, such as obtaining planning permission. Initial considerations may include an Option Fee for landowner, and for the Legal and Agent costs to be paid by the Land Promoter or Housebuilder, in the first instance.

An Option Agreement provides a solid commitment from the Land Promoter or Housebuilder that they will be seeking opportunities to purchase and develop the land in question, once planning permission is obtained.

We know just how crucial it is to ensure an Option Agreement is fully and properly negotiated. The length of the agreement and the valuation of the land, as well as the detailed terms about who owes what and at which times, are all vital in making sure the agreement works properly for both parties. It may be necessary for an Overage Agreement to be negotiated alongside the Option Agreement, so that if the land increases significantly in value once developed, the seller is able to obtain an additional payment after completion, which is calculated on the increase of value.

Promotion Agreements

Unlike an Option Agreement both Landowners and Land Promotors have a common objective, to maximise the sale value of the land. A Promotion Agreement will usually contain some similar obligations such as gaining a planning permission, but does not give the developer the right to buy the land. Instead, the Land Promoter will be entitled to a percentage of the sale proceeds as and when the land is sold.

Land Promoters may pay a promotion fee upon entering a promotion agreement, and agree to pay the Landowners Agent and Legal costs for negotiating and preparing the agreement. In addition, they will undertake to promote the land to obtain the most beneficial planning permission to maximise its value, always taking into account any special requirements of the Landowner, and within an agreed time frame.

Once planning permission is obtained, we, as selling agents, will agree a marketing strategy with the Promoter and Landowner and then invite bids from developers, and those who might be interested in the land, to secure a sale on the most beneficial terms. The sale proceeds are then split in accordance with the Promotion Agreement.

The length of the agreement, as well as the detailed terms, are all vital in making sure the agreement works properly for all parties.

Hybrid Agreements

Housebuilders are increasingly prepared to enter into Hybrid Agreements to try and reassure the Landowner with the ‘best of both worlds’. A Hybrid Agreement can attract a major Housebuilder, who wouldn’t consider a pure Promotion Agreement, whilst also keeping an alignment of interests through the hybrid nature of the agreement. The Hybrid Agreement is based on a Promotion Agreement with the Housebuilder then having a right to develop out some or all of the land. For some sites this can achieve the optimal value.

Conditional Contracts

The most common condition is the Land Promoter or Housebuilder obtaining planning permission for a particular use. If the buyer obtains its required planning permission within the time limits set out in the contract, the contract will then become unconditional and both parties will be obliged to complete the sale.

The contract will set out detailed provisions regarding the type of planning permission to be obtained, the timetable for applying for it and (if necessary) appealing against either a refusal or any “unreasonable” conditions imposed on the permission.

A buyer will wish to have as much control as possible over this process, so that they are not obliged to complete the purchase if it does not obtain planning permission in its required form, and within its required timescale. On the other hand, a seller will want to make the contract as water-tight as possible, to avoid the buyer being able to ‘walk away from’ the contract.

Consortium and Collaboration Agreements

There are many potential conflicts of interest between Landowners when it comes to master planning a development scheme across multiple ownerships. There are several ways to equalise the proceeds but if all the land is expected to be developed, it is often pro rata of the planning consent area. For larger schemes where housing numbers are uncertain, part of the proceeds are often equalised to follow the planning consent area and part of the proceeds to follow the area included in the consortium agreement to start with. That way, there is a ‘reward’, with some proceeds payable to Landowners whose land may not be allocated for development in recognition of their participation in the original agreement. Note that Collaboration can take place with and without a formal Consortium Agreement.

Joint Ventures

Landowners can become involved in a development by way of a Joint Venture for example though a Special Purpose Vehicle Limited Company or a Limited Liability Partnership. Benefits can include capital relief. In some cases Landowner’s transfer their land into a joint venture company, the developer puts cash into the company to acquire their share of the land and to cover the landowner’s capital gains tax, and provide any upfront money required. In other cases, landowners put in the land, the housebuilder funds the building of houses and the receipts are divided in a pre-agreed way.

Part of our roll at Melfort Strategic Land is to assist you in choosing the right agreement alongside the correct advice.

Legal Advice

Specialist Strategic Land Agent advice is needed in dealing with Strategic Land. However, advice from a specialist lawyer is also essential when agreeing the Terms for a Promotion, Option, Hybrid or other type of Agreement or the sale of Strategic Land. We work closely with a few third-party lawyers who specialise in Strategic Land and who are very experienced in this complex area to ensure the Landowner achieves their objectives.

Tax Advice

Taxation on strategic land can also be complex and is a vital part of any agreement. Melfort Strategic Land always advise to seek professional tax advise at the start of the process.