With Government pressure on house builders likely to return especially in the south-east, owners of previously developed sites, home owners with large gardens and owners of greenfield sites on the edges of towns and villages are likely to be approached by developers with a view to granting them land options.
“There is a downside,” warns David Platt. “The landowner has to put on hold any plans for the sale or long term letting of the land over the duration of the option period which can be typically five or more years.”
“More worrying though is the risk that the developer will not devote resources to promoting the site but instead just use it as part of their land bank, concentrating instead on promoting another rival site favoured by the developer and preventing the landowner from developing his own site.”
A traditional option agreement typically involves the developer paying the landowner an upfront fee and paying the landowner's legal and agent's costs. In return the landowner gives the developer a specified period of time in which to promote the site for planning and an option to buy the site if planning permission is obtained.
If the developer goes on to buy the land, they pay the landowner a price based on the open market value of the land with the benefit of the permission, subject to a discount (typically 10-20%) as the developer's reward for investing the resources in obtaining the planning consent.
Platt continues: “There is an alternative and lesser known agreement which is increasingly being chosen in preference to option agreements. Promotion agreements share many common features with option agreements, such as the developer making an up front payment to the landowner and committing the resources to promoting the site for planning. However, the difference is that once planning permission is obtained, the developer and landowner jointly offer the site for sale on the open market, so as to find out its true value and achieve the maximum price.
“The developer then has the option of buying the site at an agreed discount to market value or taking a percentage of the sale price achieved. In this way, if the developer chooses to buy the site, the landowner will at least have tested the open market and will therefore know whether the developer's bid is for full open market value, or if the landowner sells to a third party, the developer gets a share of the price achieved and thus has as much incentive as the landowner to maximise the price.”
Platt concludes: “By fully understanding the whole process and options available to them, landowners should feel confident they have achieved the best price for their land.”
