This is a short note about the various types of structures that can be used to buy or sell land, and some of their pros and cons. This should be useful for all Development/Regeneration staff who are involved in buying land directly from landowners, or who may be dealing with other players in the land market such as developers.
Probably the most common way that Registered Providers buy land. Terms are agreed and the seller’s commitment is obtained by exchanging contracts. Equally, the buyer (the RP) is also committed to the purchase if the condition(s) in the contract are met. Typically this will be obtaining planning permission that is acceptable to the buyer, but can include other conditions such as funding availability, Board approval etc. The purchase price should be agreed either in terms of a fixed amount or through a formula. It is likely to be based on a land value which assumes that a planning commission will be granted that increases the value of the land from its current condition
The main benefit from the RP’s perspective is that the contract means the seller is committed to the sale. The main risk for the RP is that the conditions need to be very carefully worded to ensure that the RP can back out of the contract if the condition is not met to their satisfaction (e.g. the type of planning permission obtained). Also, the RP would wish to be able to recoup the costs they have incurred of obtaining planning permission (and the associated increase in land value) under the deal. They would not wish to pay full value for the planning permissioned land, when they (not the landowner) have paid all the fees and costs associated with getting the value uplift.
Unconditional Contract with Overage Agreement
This structure is associated with an agreement to buy the land at its current-use value, making no assumptions about value uplift that may arise through obtaining planning permission. However, the Overage Agreement elements of the contract will say how any value uplift obtained is to be shared between the RP as the new owner, and the previous owner of the land.
This structure is useful insofar as the land can be purchased for a reduced initial capital outlay, but the final cost of the land isn’t known until all the circumstances covered by the Overage Agreement have been finalised, or their expiry dates have occurred.
Option Agreement (a ‘call’ option or a ‘put’ option)
This is the classic tool used by developers, and RP’s are likely to find themselves dealing with developers who have land under option. They may or may not have any contact with the actual landowner.
Under a ‘call’ option agreement, the landowner agrees that they will not sell the land to anybody apart from the developer for a defined period of time. This can range from only a few months to several decades. During this period, the developer can choose to purchase the property, but does not have to do so. It is their decision whether to ‘call’ the deal in. There will usually be some events or triggers which, if they occur, mean that the developer has a much shorter timescale in which to decide whether to exercise their call option or not. Typically this would be the granting of planning permission on the land. This arrangement places most of the control in the hands of the developer, with the landowner being able to do very little other than wait for the developer to call for the land, or for the option to expire, when the landowner can then market the property again.
A ‘put’ option agreement is similar conceptually, but during the period of the agreement, the landowner can require the developer to buy the land. This place is a lot more power in the landowner’s hand, and is much less common form of agreement.
RP’s may be negotiating with the developer who has a call option, and who may encourage them to “work with them” in obtaining planning permission suitable for both parties. In practice this can mean the RP is invited to spend considerable time and (quite possibly) design fees, helping to get a planning permission that suits the developer, and which will enable them to exercise their option. The main risk from the RP’s perspective is that having used them to help obtain planning permission, the developer may then sell to somebody else. This risk can be mitigated by the following agreement.
Exclusivity & Indemnity Agreement
If an RP is spending time and money trying to obtain planning permission for land owned by someone else (and who will therefore get the value uplift if the planning permission is granted), they face the risk that it proved abortive if the land is sold to someone else either before or after the planning permission is obtained. The RP should therefore give serious consideration to requiring the landowner (or developer, if the developer has an option agreement on the land) to enter into an Exclusivity & Indemnity Agreement. This simply says that the landowner/developer agrees to deal only with the RP, and to reimburse the RP’s reasonable fees and costs in the event that the landowner/developer sell the property to anybody else prior to some agreed events/timescale.
This is where a landowner grants another party the right of first refusal. Under this agreement, neither party can force the sale/purchase through. It simply says that if the landowner decides to sell, they will offer it to the other party in the Agreement before they offer it to anybody else.
If the RP is dealing with someone who claims to control the land because they have a pre-emption agreement on it, they should be cautious. This Agreement does not offer anything like the degree of control of a call option.
This simply means that two parties have entered into some kind of game/pain share arrangement the terms of which will be specific to each JV. In the land market context, the landowner may not wish to sell their land to the RP for a fixed price, or indeed a formula which is calculate it after planning permission. They may wish to share in the sales risk. They may therefore suggest that they are each 50% owners of a company that buys the land, undertakes the development, sell the property and may deliver profits it can. This would then be shared between the owners.
Negotiating the terms of the JV can be straightforward but can be very complicated and difficult, depending upon the attitudes and behaviours of both parties.