I’ve purposefully kept this piece short and simple. The internet is awash with legal technical advice but I believe simple and straightforward is best. This information is really directed at people selling larger parcels of farmland, or strategic land, rather than residential or commercial property, but bits of what I say here will still apply.
There are various reasons why you are considering selling but there are probably three main drivers to consider when deciding to sell strategic land, and in order of priority they are;
There is no point in selling land if you still need to use it for other purposes and you are happy that the land holding satisfies your current needs. In other words don’t sell for selling sake. But it is advisable to be aware of the other two drivers and keep an eye on external forces.
This is a really important point that a lot of people overlook – what is the status of the local plan i.e. what is the local planning authority (LPA) doing and how are they tackling housing delivery ? Each LPA has a requirement to satisfy its delivery of housing numbers and each of them has an obligation to publish a local plan to identify housing sites in five year cycles. So you need to be aware of the status and timetable of your local plan and there are times within that process that ‘promoting’ land to the LPA will be pointless or absolutely necessary. If you miss the window to promote your site you may well have to wait for several years before you can do anything again. I always say to people even if you’ve got the right site in the right location, the LPA wont come knocking on your door.
This point in my opinion is less important than the first two, for several reasons; the cycle between you making a decision to sell and actually selling will be many years, so trying to hedge your bets on the market over a long period is less important than making sure your land does have planning status. There are various ways that you can structure a contractual arrangement with a buyer to partially insulate this variable and this further reduces the importance of this third point as part of the decision making process.
Believe it or not, there are three main deal structures that you can consider and that means that there are two or three different types of companies that you should consider. Who you deal with is really important so please do read it carefully.
So you probably have a land agent (or been told about one) they might be from a national firm or a more local smaller practice. In either case, do not simply rely on them because they have the word ‘land’ on their business card. They may be perfectly excellent and advising you on crop rotation or selling wheat or livestock but have very limited experience when it comes to selling land. So point of note, make sure you find an experienced practitioner who can act for you when negotiating with a buyer. As importantly make sure either they or someone in their team has a depth of strategic planning experience. Your team will not only be advising you on a sale but they will also likely be your ‘agent’ during the contractual process along the planning journey. These people are out there and some of them are excellent, and others just don’t have that kind of experience. You need a team that can demonstrate a track record in finding an appropriate buying party, negotiating complex contractual terms and keeping a check on whether those terms are being fulfilled. I can’t emphasise enough that you need to find the right team to advise you, they can make or break eventual success.
You agree a price that both you and the buyer are happy with and you exchange and complete contracts. You get your money and they own the land. There are of course nuances to this process which could involve ‘an overage’ – for example, if the buyer gets a planning permission withing a certain period of time, you get a top up payment; ‘deferred consideration’ – you take payments in tranches, over time, which is acceptable. With any future payment structure, make sure you have the correct legal protection on the title, either a first charge or a restriction.
The upside, to this method of sale, is that you get the price you have agreed within a timeframe you have agreed. The downside is that this is likely to be the less financially rewarding method. The general rule, if you allow a buyer more time to pay or more time to get a planning permission then you will share in that increased value.
This may on first glance be counter intuitive. The general principle is that you give a buyer an option, not an obligation, to buy the land for a fixed period of time. This means that if they want to buy you have to sell, but they don’t necessarily have to buy from you. There are contractual methods which obligate a buyer to buy, if certain conditions are satisfied and this is usually known as a ‘conditional contract’. My view is that in most cases the list of conditions are exhaustive and complex so you essentially arrive back at a position where the buyer has an Option to buy rather than an obligation to do so.
So if you are giving someone a option to buy you should expect something in return. In essence you are sterilising your land, entrusting its short term future to a buyer so there needs to be consideration for you, the landowner. Consideration usually comes in the form of an ‘up front’, ‘non refundable’ payment (which in some cases can be a hefty sum) and often attracts owners, and more importantly, distracts owners from the real essence of the deal.
What you are trying to really achieve is utilising a buyer’s planning experience and their financial commitment to pursing the planning journey. You are entrusting them to unlock future value. So if you are considering this method of sale you should be focusing on the contractual ‘milestones’ the deliverable objectives and the method for working out the price that they will pay for the land, not how much the buyer is willing to pay for the position in the first place.
It is usual in these forms of contracts to establish a price with a buyer that is a ‘discount from market value’. This generally equates to the buying expending planning costs at their risk and in return wanting a discount from future market value, expect that to be 10%-20%. The health warning that often comes with Options where the price is variable, is how the parties actually establish market value and therefore the Price. The buyer will want to load costs into the equation that degrade the price. Items that they claim are unknown, like highway works, foundations costs, planning obligations (106 payments or CIL contributions). The danger here is that the price you actually receive is both discounted from an unrealistic assessment of what market value is and further discounted by unknown costs. Some developers and housebuilders have a bad reputation from taking advantage of these clauses when paying for land.
Its worth reviewing this article, https://valuemyland.uk/what-is-a-valuation that reminds us that value can only be established by a marketing exercise. The problem with an Option, where Price is determined by a ‘valuation’ is that the criteria for that valuation often creates a poor effect for the landowner.
My advise is that entering into an option, unless it is for a predetermined fixed price, over a predetermined period of time, is to be avoided. A price established by a ‘valuation’ exercise is artificial and often penalises the landowner. The important point to note is that when you are considering this form of agreement you will likely be considering doing a deal with a housebuilder. Their objective is to buy the land cheaply and develop it. So this relationship and process avoids the all important ‘marketing’ step. As said a true price can only be established by a marketing process, when you are offering a property, with planning permission, for sale on the open market.
A Promotion Agreement (PA) is actually a very good way to sell land. Or more accurately a good way to facilitate the pursuit of increase value through a planning consent and then a land sale.
The terms set out the responsibilities of both parties. The Promoter will promote the land through the planning process, making submissions through the local plan process in an attempt to get the land allocated for housing. Once allocated it usually obligates the promoter to apply for a planning consent and once consented to then, in conjunction with an agent jointly appointed, market the land for sale.
I have simplified what is usually a 60 page contract into a paragraph, so forgive my simplicity, but I am trying to impart the important facts and why this form of contract is in my view the best way to achieve a land sale, as long as you are prepared to give the promoter the time needed to obtain a planning consent.
I would not consider an offer from a promoter unless they have clearly demonstrated specialist knowledge. Translated this into an informative offer document so you and they both understand and agree expectations of timescales (which are largely driven by the local plan timetable). Any offer should address what other sites you are competing with and their commitment that they will not promote any other sites within an area that competes with your site.
Planning promotion and applications are complex and expensive. Most run into the hundreds of thousands of pounds. So you should be assured that a promoter has a good track record, demonstrable expertise and the funds to be able to support the planning strategy.
If everything looks positive and you are comfortable that you have chosen the right party – its important because you will be working together probably for many years – then you can explore more detailed terms to include in the contract that are perhaps more specific to your objectives.
The reason that this form of contract is so ‘balanced’, is because the promoter will usually cover the cost for promotion and planning work at their risk. Then will then expect a ‘fee’ for their work, which is a percentage of the eventual sale price. Depending on planning status and risk, you can expect this to range from 10%-25% and will usually attract VAT.
The Promotion Agreement binds the promoter and the landowner to a shared vision and journey, both parties incentivised to maximise the value of land. So unlike a discounted option agreement, the promotion agreement incentivises the promoter to get the maximum value because they share in that value. So if you are interested in maximising value, in my opinion this is the best contractual route to explore when considering selling land.
In contrast with an Option agreement this form of agreement provides for a marketing exercise following a planning consent. This is the way to establish a pure market value and an accurate selling price. Housebuilders and property developers will not enter into this form of contract because they don’t want to sell the land at the end of the process, they want to buy it for development. So for this very important reason alone it is worth avoiding a variable price option, that relies on a valuation process and pursuing a promotion agreement that relies on a sale process.
I have purposefully tried to simplify what is actually a very complicated process and there is of course a lot more variable that you need to consider when entering into contractual arrangements for selling land or property. As advised earlier, surrounding yourself with the right people is critical to the pursuit of a successful outcome. Never go with the cheapest option, always consider the required specialisms and the individuals that you are dealing with and make choices based on their experience and demonstrable knowledge, not just who is prepared to offer you the cheapest solution – in my experience it will often cost you the most.
James Sorrentino is a chartered town planner and an RICS registered valuer. He has been a specialist in strategic planning for over 20 years and with his team achieved planning permission for thousand of houses across the UK, delivered on complex garden villages and single owned settlement extensions. James is happy to talk to any landowner who is in need of advice so feel free to drop him an email – james@sorrentino.co.uk