Agreements for property development
Ever since the Chancellor announced in the October Budget that he had allocated £1.8bn to brownfield development, many developers have seen this as a huge opportunity.
Daisy Scaife, a senior associate in our property team, explores the various types of agreements that developers can use to acquire a site for redevelopment, but advises that the most appropriate will depend on the negotiating position of a developer and a landowner, cashflow and timescale, and the appetite for risk. The options are:
A conditional contract
A conditional contract is a binding contract for the sale and purchase of a site which is subject to satisfaction of one or more conditions precedent, the most common being a planning condition.
A conditional contract is appropriate in the following scenarios:
- There is a restrictive covenant preventing development on the site which the seller can seek a release from;
- The site has an outline planning permission and the developer is applying for a reserved matters approval;
- The site is currently occupied and the developer wishes to complete with vacant possession.
The contract will contain obligations on either the seller or the developer, depending on who is required to satisfy the conditions precedent, and if these are not discharged by a long stop date, the contract will either terminate automatically or one of both of the parties will have the right to terminate.
Satisfaction of the conditions precedent will trigger completion of the sale and purchase of the site.
An unconditional contract
An unconditional purchase does not require the satisfaction of any conditions precedent. A developer will buy the site outright on an agreed completion date.
This is not always an attractive option as there is a risk that the development is not viable due to planning, or not feasible due to site constraints. However, if there is significant interest in a site, a landowner is likely to proceed with an offer of an unconditional contract due to the certainty of receipt of the completion payment.
An option agreement
The most common type of option agreement is a call option which allows a developer to “call” on a landowner to sell a site to it during a specific period. This is usually linked to a planning permission being granted for redevelopment.
An option agreement may be more attractive as the developer can still walk away from the acquisition, but it is protected from the landowner selling to another party. Option agreements are commonly used where there are multiple landowners and site assembly is required.
A promotion agreement
A promotion agreement is used where a developer (or promoter) submits a planning application for development of a site and markets the sale on the open market once planning permission is obtained. In this instance, the developer/promoter will not become the landowner. The promoter is reimbursed for the planning and marketing costs and the agreement will set out a share of the net sales receipts from the unit sales.
As an aside, a developer and landowner may also enter into an overage agreement which requires a future additional payment to the landowner if an agreed trigger event takes place within a set period, following completion of the sale and purchase. An overage payment is usually negotiated if the landowner believes that the value of site will increase in the future but is willing to sell at the current market value. A trigger event could be the grant or implementation of a planning permission, disposal of the completed units at the site or disposal of the whole site with a planning permission.
Overage provisions are often complex and require careful consideration and drafting to ensure that there is no dispute once a trigger event occurs.