Strategic Land & Property Advice

Land & Property

A brief introduction to different types of property deals

The law relating to land and property in England & Wales is complicated and certain aspects of it are continually changing. The scope of this website is not to provide great detail relating to property law and practice but to summarise the main interests and how they relate to strategic land.

In dealing with strategic land and property the following 7 types of deal are the most commonly used 'structures' for transactions:

1.Unconditional freehold purchases

2.Freeholds with overage provisions, such as 'uplifts', 'top-ups', 'clawbacks' and 'ratchets'

3.Purchases conditional on planning allocations or consents

4.Pre-emption arrangements varying from the one off to the enduring or conditional

5.Non binding 'lock out' or 'exclusivity' agreements

6.Option agreements varying from the simple to 'put and call' and the extensive promotional deals

7.Promotion agreements

1. Unconditional freehold purchases
This is the simplest form of deal where any uplift in value from an allocation or planning consent for development, benefits the only the new owner.

The price paid for the property interest reflects the market's view of the future potential of the land, whatever that might be and however long it may take to come to fruition. The open market value consists of two elements; firstly the base level of existing use value, and secondly any additional amount of 'hope' value or future potential the property may have. The greater the potential the larger the amount of hope value.

Clearly this type of deal requires the greatest amount of capital input and the highest level of risk but secures for the purchaser the maximum return if succesful.


2. Freehold sales with arrangements for additional payment
The next level of deal is one where both the vendor and purchaser have accepted that there is a greater chance of 'hope' value and the vendor is now seeking a share of the proceeds after legal completion of the sale.

In this situation the contract for sale will include a provision that if the purchaser achieves an allocation or a planning consent at some point in the future then the purchaser will make a payment of an agreed share back to the original owner. This is a commonly used arrangement and the terms will reflect the market conditions, the planning prospects and the negotiating strengths of vendor and purchaser.

The provisions that can be included are wide and various, but fall into a series of categories:

Descriptions: 'top-up', 'overage' and 'clawback' seem to be the most commonly used terms.

Term or duration: these can be anything from 5 to 21 years, and occasionally longer.

Trigger: The event that will usually trigger a payment can include anything from the allocation of the land at one or more of stages of the Local Plan process or one of the points of the grant of outline or detailed planning consent.

Security: Having conveyed the freehold the challenge is how the vendor can secure it's due payment if the new purchaser has triggered a payment by securing an improvement in planning pedigree of the property.

Obligations: The parties may agree that the new purchaser will undertake certain activities to improve the planning prospects of the land such as making representations to a new Local Plan stage. This also has to cover the eventuality if the purchaser doesn't comply after completion.

Value: The deal may specify actual figures to be paid if certain planning goals are achived. If not the amount of payment will have to be determined by reference to a valuation exercise in the future. Both this, and any disagreement between the parties on the result, will have to be considered in the documentation.


3. Conditional purchases
This is generally a type of transaction relating to freehold purchases although it is perfectly possible to have a conditional contract to buy any assignable leasehold interest. The essential difference between this type of deal and the two above is that the transfer of the property interest may not necessarily be completed. Whilst the parties exchange a contact the final completion and transfere of the property is conditional on certain conditions being fulfilled.

The most commonly used form of conditions relate to planning matters, where the purchaser will only buy the property if a planning consent is granted first.If it is not then the relevant condition will not have been satisfied and the contract will generally terminate and the deposit be returned to the purchaser. The relevant condition(s) could simply require an allocation or be as specific as requiring a detailed planning consent aceptable only to the purchaser.

The conditions could be more than one and could relate to other matters such as highway improvements or an access being available or more extraneous matters such as the purchaser acquiring land nearby.

With the wide range of possibilities it is essential to think through the possibilities and implications if the matters envisaged by the conditions do not go to plan. I would offer a list of issues to consider when envisaging this sort of deal that bear a similarity to those affecting options.

The extent of the land or property which is bound by the contract.

The implications to any remaining land which is excluded if the purchase is completed.

The duration of the contract and any possible time extensions.

The conditions that need to be satisfied to justify any extensions to the contract.

The size of the deposit payable on exchange.

The amount of the deposit which is returnable if the purchase is not completed.

The condition(s) which have to be satisfied to purchase the property.

Who is to be responsible for undertaking the activities to try to comply with the conditions.

The arrangements if the party responsible for the activities necessary to comply with the conditions does not do so at all, or in part or not on time, or does something completely different.

What happens if the conditions are not met, or partly met, or a different outcome is achieved completely unforseen by the original conditions.

The process for arbitration if there is a dispute between the parties.

As is clear from the above this can end up being a very complicated form of agreement. At one end of the scale can be simply and clearly executed. At the other end of the scale this can be virtually the same as an option with the purchaser having the ability to choose whether or not to buy.


4. Pre-emption agreements
These are generally arrangements negotiated between parties which allows one party a right of first refusal to purchase a property when it is put on the market by the vendor.

It is often agreed between a developer and a landowner where, for a fee, the landowner agrees to sell to the developer a property interest despite enquiries from others. The advantage to the developer is that it has pre-empted other interest from the open market and has the ability to buy. The advantage to the landowner is that it has a firm purchaser.

There are many variations of the basic form of pre-emption, but I would list the main types of provisions contained in such agreements as follows:

Is this agreement linked to, or combined with any other form of deal, such as an option?

What is the duration of the pre-emption agreement?

Is the pre-emption assignable by one or more parties, and if to whom and are there any qualifications for assignment?

Is this a one off or recurring arrangement that runs with the land during the period of the pre-emption?

Is the pre-emption agreement secured by a legal interest in the land, and if so, what is the nature of the interest?

Are there any arbitration provisions if there is a dispute on value or terms?

Does the agreement allow the exclusion of 'rogue' or 'special' purchaser bids?

Does the land interest have to be openly marketed and what form of sale is specified, eg. auction, sealed bid, formal tender, private treaty?


5. 'Lock-out' or 'exclusivity' agreements
These are agreements often used in times of market volatility or great competition. It is used where the parties need time to fully resolve the terms of a deal between themselves before they instruct respective solicitors to proceed drafting the documentation.

These are most often short i.e 1-4 pages, relatively simple non legally binding documents that are demonstrations of good faith between the parties. They are to show that the parties are minded to try to agree the terms of a deal between themselves and exclude interest from others whilst they do so.

The terms are simple and often comprise no more than the following:

The names of the parties.

The location and description of the property.

The duration of the agreement.

The intention in good faith to agree the terms of a deal between the parties.

The agreement to exclude all other interested parties during the period of exclusivity.


6. Option agreements
When promoting strategic land the most cost effective method for a developer or land promotion company is generally considered to be the option agreement. It can range from a simple document to a very complicated and intricate legal agreement which can have far reaching effects for both the landowner and the promoter.It should though have the basic general characteristics;

It binds two parties (a prospective vendor and a prospective purchaser)
together exclusively for a specified period of time.

If the conditions for exercising the option are satisfied,the purchaser can compel the owner to sell.

The purchaser generally has the discretion not to buy if it decides not to exercise the option.

The option is a formal legal agreement exchanged between the parties and is registered with HM Land Registry as a 'caution' or C IV land charge which secures the developers right to purchase the property or land at the point in time when the option is exercised. Under the Perpetuities & Accumulations Act 1964 an option can be agreed to extend for up to 21 years. In view of it's possible longevity it is essential to fully understand it's provisions.

Concentrating on a promotional option agreement it should have the following contained within its provisions.

The extent of the land or property which is bound by the option.

The duration of the option period.

Any extensions to the option duration.

The premium or fee for the grant of the option to the developer or promoter.

The amount of land that can be purchased.

The obligations on the developer or promoter to promote the property.

The stage that has to be reached before the developer can start the process of purchase.

The process in which the value of the property (or part of it) to be purchased is established.

The mechanics of succesfully exercising and completing the purchase.

The arrangements to resolve disputes between the parties.

The arrangements for terminating the agreement.

The most important aspect of this type of tranaction is that the purchaser has the discretion to acquire the property if it so chooses, whereas the vendor is legally compelled to sell the property to the puchaser if the option is validly exercised.

One of the variety of option agreements includes the 'put and call' option. This is slightly different as it increases the obligations and liabilities of the parties. The 'put' element means the option holder can acquire the land when the relevant circumstances that need to be satisfied are achieved and the option can be exercised at the option holders discretion. The 'call' provision is the ability for the vendor to start the process to compel the purchaser to acquire the property. If the relevant conditions are satisfied the purchaser is legally obliged to buy the property at whatever figure is determined by the agreement.


7. Promotion and/or partnership agreements
These are similar to options but are designed from the outset to align the interests of landowner and promoter more closely together. Both parties wish to see the land allocated, planning consent granted and the property sold for the optimum price.

The difference is that the landowner remains involved for much longer, with the promoter generally putting in the infrastructure necessary to service the land for sale on the open market. The attraction of this is that the landowner sees the final outcome of a sale in the open market and often receives a greater return because the land is serviced and ready for construction. The downside is that the landowner has to wait longer to receive the proceeds of disposal.

However the aspirations of the parties differ from those in a traditional option in one very important area, namely that in an option the purchaser is trying to acquire the property at the lowest price and the vendor is trying to obtain the highest. The other distinction is that the timing of obtaining a planning consent triggers the process of acquisition. If demand is strong and values are high the vendor benefits. But if the process is commenced at a low point in the property cycle when values are poor, the purchaser may be able to purchase land inexpensively. The vendor will have quite properly received a sum based on market value, but this will not be the optimum figure in the property cycle.

Timing clearly is critical to both parties and profoundly affects the return they receive. The land promoter often receives a lower return as he takes a small percentage of the sale proceeds but runs less risk as he doesn't have the cost and risk of owning the land before it is sold on in the vagaries of the market.

A promotion or partnership agreement should contain the following:

The extent of the land or property which is bound by the agreement.

The duration of the agreement.

Any extensions of time to the agreement.

The premium or fee (if paid) by the promoter.

The amount of land that can be purchased.

The planning obligations on the promoter to promote the property for development.

The obligations to submit a planning application and secure a consent.

The requirememts on the promoter to put in the necessary infrastructure to service the land ready for sale on the open market.

The process in which the value of the serviced land and property is established.

The process for marketing the land to achieve the optimum price.

The mechanics of transferring the land to third party purchasers.

The arrangements for funding the planning and infrastructure costs.

The agreed split of the sale proceeds on disposal.

The arrangements to resolve disputes between the parties.

The arrangements for terminating the agreement.

Whilst the concept is simple this is one of the most complicated forms of transaction, needing very careful thought on the detail to make it work well.

In my experience the more complicated the deal, the greater the number of variables, and the more things there are to go wrong.