Developers are astute business people. When dealing with them it is wise to keep your wits about you. Here are some common transaction structures employed by developers and some thoughts on how to deal with them.
An option is a favourite tactic used by developers. Under the terms of an option, a landowner agrees that for the duration of the option the developer may buy the landowner’s land at what may seem to be an attractive price – the illusory pot of gold at the end of the rainbow. However there is no obligation on the developer to exercise the option and all that is achieved is the neutralisation of the landowner’s land for the duration of the option. In addition an option may be a ploy whereby a developer obtains a commitment from a landowner that they will not object to any planning application by the developer who then promptly applies for planning on a totally separate piece of land, owned by somebody else, which was their ultimate objective all along.
A conditional contract, where a developer commits to buy the land if certain conditions are satisfied, such as obtaining planning permission for the site, may appear on the face of it to show a high degree of commitment but the devil is in the detail. A weasel worded conditional contract can make the conditions almost impossible to achieve in which case the developer has simply tied the landowner up with another option agreement.
With both options and conditional contracts, a landowner restricts their ability to deal freely with their land for the period of the agreement. A right of pre emption is less restrictive on a land owner and only operates if the landowner decides to sell. It is a right of first refusal whereby if the landowner decides to sell they must first offer their land to the holder of the right of pre emption.
Another structure used by developers is the sale of land subject to overage. Overage is the clawback mechanism where hope value in the land can be realised in the future. As an example, a landowner sells land to a developer with the provision that if planning permission is obtained in the future they may claw back a percentage of the increase in value of the land due to that planning permission. Again there are many potential traps. The landowner will need to consider what may happen to their land in the future and provide for various ‘what if’ scenarios in the overage agreement. The formula for calculating the overage payment needs to be carefully thought out – how many times will it apply? How is the overage to be protected on the deeds?
Lastly the simplest transaction structure and the one least often used is the sale of land at market value with no ongoing involvement with the developer. In most cases this is the best transaction structure for the landowner.
When dealing with developers a landowner should always take independent advice which we at Hart Brown are happy to provide.