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It's good to have (land) options

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Its good to have (land) options

Our PM has said we should “build, build, build”. The planning system has recently been shaken up.  Pressure on certain pockets of land to be brought forward for future development is going to be high. But how should you react if you are approached out of the blue by a developer with an attractive cash incentive and a request for an ‘option’ on your land? What if you want to build on someone else’s land?

Requests to our property team to either assist with advising, drafting or reviewing land options of varying types are increasing. This isn’t just for residential or commercial development, but also includes renewable energy projects.  However, there is no ‘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 of certain clauses in an option agreement that you could be looking at?

It is worth bearing in mind that, depending on the type of agreement, essentially a landowner will be looking to achieve the highest price possible for the land, whilst a 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.

What are the options?

A land option is an agreement between a developer and a landowner giving the developer the right to buy the land at a certain point in the future, usually when planning permission is granted. The developer wants to secure exclusivity to the land to allow it to carry out the investigations to see if the land is viable for the specific use it requires.  If the option has no conditions, or all of the conditions for exercising an option are satisfied (for example planning permission or grid connection) 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, parties may enter into a conditional contract which actually obliges the developer to buy if the conditions are satisfied.  Increasingly, promotion agreements are being used in conjunction with a contract. The developer will be required to promote the scheme it is 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.

The bigger picture   

Firstly, as a landowner, you need to look many years into the future to ensure you won’t regret the agreement you signed up to.  To do so, 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 if you 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 next door – it’s worth thinking about….

Secondly, establish how keen the developer is to develop the site. Is it looking to take options on a number of sites in your area and then only develop the easier sites?  Does it have the track record and resources to develop?  Development requires a significant investment of time and money, particularly in relation to planning permission, therefore you don’t want an option to just sit in place for years only for 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 reach the end the option or contract period with no progress having been made to carry out the intention 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.

Time, energy and costs

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 and going to the lengths of obtaining and paying for a grid connection.

Developers may also find that the Community Infrastructure Levy (CIL) 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.

The costs of these applications can run to hundreds of thousands of pounds and the grid connection itself may need cables to pass through land owned by several people, each of whom in turn may want a fee for granting a cable access right.

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 who share the access – is the access currently for all purposes or only for agricultural use (and so cannot be used by residential or energy end users)?

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, residential or commercial development will need access for traffic movement to and from the site on a daily basis both before and after construction, and the wider effect on the local area will be taken into consideration as part of the planning application.  This may add to the amount of time it takes to complete the planning process and therefore how long the option should be in place.

When considering any type of option 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 of the land to show how ownership can be established.  There can also be the additional implications of any historical rights or leases which your solicitor may uncover during this process.

Going underground

Private drainage, pipeline and cable rights can cause an issue, as detailed routes of pipes in documents and plans can often be incorrect.  Before any heavy plant can set one wheel on the ground, it is important to establish where cables or pipes are and whether they may need re-routing or protection in some way.  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 that land. A situation could arise, for example, where the rear gardens of a new scheme of houses or a strip through a solar farm has to be dug up because someone has an historic right to access their drainage pipe.

The other main issue that could arise involves mains water and gas pipes as well as occasionally underground electricity cabling. Providers of these utilities will always 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 for a developer to take out an insurance policy against the cost of someone suddenly exercising that right.  As a landowner, you can be asked to make a statutory declaration detailing the length of time you have owned the land and that no third party has accessed it to use such rights.

Dig for victory

Once these, and other factors, are in place the site becomes ‘shovel ready’ and the developer will start work or may go to a secondary market and invite offers from larger developers who have access to funding who can build out the site.

Therefore, if you have a piece of land you are considering buying, selling off or granting or taking 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 in the future. 

A good property solicitor will be able to advise you on these and all other issues to consider so that you get a good return on your project.

You can contact myself and the commercial property team for advice on:

📞 02380 221344 / 01202 315005
📧 contact@duttongregory.co.uk

This article is not intended to be a full summary of the law and bespoke, specialist advice should be sought on all issues.