If you are fortunate enough to be a landowner, you will require guidance on how you can maximise your returns when the time comes to sell part or all of your land holding. If you are selling land that has potential for development, it is worth knowing that you can negotiate a conditional uplift in the value of the land for development, if planning permission is granted in the future.
If you are a land developer, you will require guidance on how to safeguard the risks of securing land with the potential for development. It is essential to ensure you understand the options available to help you or your business secure the land, maximise the development potential and ultimately benefit from any increase in value.
Below is a guide to some of the common development frameworks with a short explanation of the benefits to the landowner and developer.
A landowner can share in any increase in the value that is realised after the property has been sold. For example, if a landowner is selling land that could be developed in the future, the landowner could request that an overage deed is entered into whereby the landowner will share in the uplift of the land if the buyer subsequently obtains planning permission. An overage deed requires the buyer to make a further payment to the seller, representing a share on the increased value of the property after the occurrence of an agreed trigger event.
Examples of this trigger event could be:
- The granting of planning permission for development or change of use;
- Sale of the property at a higher price within a fixed time period;
- Sale of the property with the benefit of planning permission.
An overage is most commonly used where there is a reasonable expectation that land may be redeveloped or that valuable planning permission may be granted in the future.
Benefit for landowner: The landowner can sell at the current market value of the property without having to forgo a share in the development potential of the property when that is actually realised.
Benefit for developer: The developer is purchasing land which has strong potential for development and future profit.
A landowner can enter into a promotion agreement with a promoter, whereby the promoter will apply for planning permission and market the property for sale once planning permission has been granted. When the land is subsequently sold, the landowner and promoter both get an agreed percentage of the transaction value.
Benefit for landowner: If planning permission is not obtained by a certain date, the agreement automatically terminates and the landowner does not have to reimburse the promoter’s costs.
Benefit for developer: If planning permission is obtained, not only does the developer have all his costs reimbursed, but he will also receive a share of the net sale receipts.
An ‘Option’ to buy or sell land
This contract entitles the developer to purchase (usually for market value) land within a set period of time. Following completion of the option the buyer may apply for planning permission. The eventual purchase price is calculated as a percentage of the property’s market value taking into account any increase in value due to the planning permission that may be obtained.
Benefit for landowner: It gives the landowner the ability to sell the property at a purchase price which takes into account any increase in value due to the planning permission that may be obtained.
Benefit for developer: Securing an option agreement minimises any risk of losing the property to another buyer. For example, if obtaining planning permission takes longer than expected, the buyer can be confident that there is a legally binding agreement that prevents the seller from selling the land to another buyer.
Contract conditional on planning permission
Where a buyer is purchasing property and intending to redevelop straight away, they may enter into a contract for the sale of the property, which is conditional on the buyer obtaining planning permission.
Benefit for landowner: The purchase price can be calculated on the basis of the market value using the planning permission that is being obtained.
Benefit for developer: Buying the land with the benefit of planning permission enables the buyer to develop the site and generate the development profit. The developer can also purchase the land with the certainty that they have planning permission and can redevelop the land.