Pressure on certain pockets of land to be brought forward for future development will always be high, but how should you react if you are approached out of the blue by a smiley sales person with a glossy plan and an attractive cash incentive up front with a request for an ‘option’ on your land?
Requests to our property team to either assist with advising on and drawing up, or to review land options of varying types, are increasing and not just for residential development but also for renewable energy projects. There isn’t however a “one-size fits all” agreement or one particular way of dealing with them, so what do you need to watch out for and what are the implications if certain clauses are included or omitted from an option agreement you are looking to sign?
A land option is an agreement between a developer and a landowner giving them the right to buy your land at a certain point in the future, usually when planning permission is granted. The individual or developer wants to secure exclusivity to the land to allow them to carry out the necessary work to see if the land is viable for the specific use they require. If the option has no conditions or, all of the conditions for exercising an option are satisfied (for example a grid connection or planning permission), the developer can compel the landowner to sell. However an ‘Option’ is only that and does not force the developer to buy the land.
Alternatively a landowner may enter into a conditional sale contract which obliges the developer to buy if the conditions are satisfied. Increasingly land promotion agreements are being used in conjunction with a contract. The developer will be required to promote the scheme they are proposing within the local development framework and secure planning permission and when the land is sold, the proceeds will be divided between both the developer and the landowner.
Developers may also find that the Community Infrastructure Levy has to be factored into their costs. All the additional costs associated with developing a piece of land will in some cases, make it uneconomic to develop.
Depending on the type of agreement, essentially the landowner will be looking to achieve the highest price possible for their land, whilst the developer will be looking to reduce the cost of the land to maximize their future profits, unless they are receiving a share of the premium, so it is worth bearing this point in mind.
Firstly, you need to look to the future and ensure you won’t look back with regret on the agreement you have signed up to. It is important to look at the bigger picture. What if you want to sell the land before any planning permission is achieved or before development takes place, will it be possible to achieve the price you want and sell the land with the option in place? Will you be able to carry on using the land in the same way whilst the option is in place and can you afford not to use the land? How will it affect your operations both now and in the future if the land is taken out of your control?
Will having development take place on the land have a knock-on effect on any of your other interests? Will it for example, have an impact on the market value of your existing property? Selling-off land for development might be a good idea until you have a housing estate of people objecting to the running of your business operation – worth thinking about….
Secondly establish how keen the developer is to develop the site. Are they looking to take options on a number of sites in your area and then only developing the easier sites? Do they have the track record and resources to develop? Development requires a significant investment of their time and money particularly in relation to planning permission therefore you don’t want an option to just sit in a place and nothing to happen. You may want to consider a timeframe within the agreement to provide for a planning application (and or grid connection to be submitted and obtained if it is in the case of a renewable installation), otherwise you may end the option or contract period with no progress having been made to develop the land but with a changed market meaning others are no longer interested. The changing subsidy regime on renewable energy is a good example of how this can occur.
If you are looking for an agreement to cover a renewable scheme typically on 50 acres or more and which may involve a one or two year option, it will be necessary for the developer to secure planning permission, which includes archeological and ground surveys and even in some areas unexploded bomb surveys plus going to the lengths of obtaining and paying for a grid connection.
The costs of these applications can be in the hundreds of thousands and the grid connection itself may need cables to pass through land owned by several people each of whom may want a fee for granting a cable access easement. Sites need to be accessible for whatever purpose they are being developed and you therefore need to consider the impact on neighbours and the activities of those that can use the access– is it for all purposes or only for agricultural use (and so not residential or energy). Once these and other factors are in place the site becomes shovel (or oven) ready and the developer may go to a secondary market and invite offers from larger developers who have access to funding who can build the site. Once a solar or wind turbine site has been built it requires little in the way of ongoing access and the effects are less intrusive than other uses. However anaerobic digestion, fracking, residential or commercial will need access for traffic movement to and from the site on a daily basis before and after construction has been completed and the wider effect on the local area will need to be taken into consideration as part of the planning process. This may add to the amount of time it takes to complete and therefore how long the option is in place.
When considering any type of option on the land it will be important to look at whether the land and any access land is registered. This means that your solicitor will need to refer back through all previous conveyances on the land to show how ownership can be established and also there can be additional implications of any historical rights or leases on the land.
Drainage, pipeline and cable rights can cause an issue, as detailed outlines of the pipes in documents and plans can be incorrect. Before any heavy plant can set a wheel on the land it is important to establish where it is and whether it may need rerouting or you may need to protect the cables or pipes. Even now it is common for a piece of land to be sold off with a drainage or access right which may affect the future development of the land. A situation could arise, for example, where the rear gardens of a new scheme of houses or a strip through a solar farm is dug up because someone has a historic right to access their drainage.
The other main issue that could arise involves mains water and gas pipes and occasionally underground electricity cabling. These providers will have a right of access to the land to enable them to carry out maintenance and repairs.
Where there are old historic rights affecting the land which seem redundant, it might be possible to take out an insurance policy and the landowner can make a statutory declaration detailing the length of time they have owned the land and that no third party has accessed the land to use such rights.
So if you have a piece of land you are considering selling off or granting an option over, the key is to consider all the land uses and types of agreement which are available and ensure that you will be happy with this arrangement for the future.
This article is not intended to be a full summary of the law and advice should be sought on all issues.
This article appears in RICS Land Journal