Land Development Options - A Fair Balance

20 June 2006

The “partnership” of Landowner and Developer arising under a development option should benefit both. Often it does – sometimes it does not. The very basic principles are that the Landowner commits an area of land to a Developer on the basis that if the Developer can get an appropriate planning permission he can buy the land at a pre-agreed price (often a percentage of the open market value of the land with the new planning permission but after deduction of certain costs). On top of that, what should each be looking for?

The Developer obviously needs an appropriate option period – long enough to have a good chance of getting planning permission. It will be the state of the current local plan and planning climate which will suggest how long the period should be. Unless the chance of getting planning permission is very good, it will probably be desirable to provide for an extension of the period if a planning appeal is in progress at the expiry of the main option period.

Otherwise the mere fact that the Developer has an option (and can, therefore, choose not to exercise it) and also has conduct of the planning process puts him very much in control so far as the “partnership” is concerned. If he obtains a planning permission that suits him and the price he has to pay the Landowner is acceptable, he will exercise the option, buy the land and carry out the development (or sell the land on). His profit will be the residual percentage of the land value (net of costs) and the whole profit in building out the development.

The option arrangement, by giving control and flexibility to the Developer, takes them away from the Landowner. He now needs protection – he does not want to come out of a successful planning process and subsequent sale feeling he has been taken advantage of. Properly advised he might look for some or all of the following:

a. An ultimate longstop date of the option period – appeals can take “for eve

b. Some element of price protection/enhancement if there is a longer than anticipated period between the price being fixed and payment actually being made.

c. An involvement (probably not control) in the layout and exterior design of the development – the Landowner will have to go on living with his neighbours who will inevitably blame him (rather than the Developer) if an inappropriate development is carried out in their back yard.

d. A cap on the costs deductible in settling the value of the land. If the Landowner gets, say, 80% of the value after deduction of costs he effectively pays 80% of those costs. Some (e.g. off-site highway works) can be very expensive. Major highway works can cost millions of pounds – even fairly modest ones can cost hundreds of thousands.

e. A guarantee that any neighbouring land he owns (not involved in the option) is not blighted or otherwise adversely affected by any planning agreement (with the local planning authority) necessary to secure development of the option land.

f. To be paid out his full “share” even if the land is actually developed on the basis of a more valuable planning permission obtained after the land has been sold at a value set by an earlier “cheaper” planning permission.

g. Not being left with an unexpected tax bill if the anticipated Planning Gain Supplement tax is introduced – possibly at 20% of the uplift in land value created by the grant of planning permission.

h. His costs being paid by the Developer (or a cash payment for granting the option itself or both). Options are not cheap legal exercises and the Landowner will not otherwise get a return unless the Developer gets planning permission and buys the land.

There are other protections but these are examples.

Obviously, on a single development basis, the Developer’s financial advantage is secured without the Landowner getting any of these protections. However, if a Developer wishes to establish and maintain his reputation in a geographic area it must be in his interest to be seen to do two things:

(i) Be successful in obtaining planning permission for developments that are commercially marketable and

(ii) Come to a fair balance of interest with Landowners – leaving them feeling satisfied with their return from the project and that they have not been taken advantage of.

To be seen to achieve (i) without (ii) will mean a dwindling supply of land being made available to the Developer. The land that he otherwise might have had could now go to his competitors.

For more information please contact Christopher Wacher, Partner & Head of Commercial.
 

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