New Homes & Developments
As Westminster’s plans to increase housebuilding have progressed, so, too, has the number of enquiries we receive from landowners who have been asked if they would sell an ‘Option to Purchase’. Some have 50 acres or more, others simply a large garden. Before they do anything, the uninitiated want to know what their options, in relation to options, are.
DEVELOPER OPTION
A variety of standard agreements with different purposes have emerged over the years. The majority today involve a developer having a right of first refusal to buy land at an agreed discount to its market value, when planning permission is secured. The seller can challenge the price offered but, ultimately, is contracted to sell. Most agreements also oblige developers to actively seek planning within agreed timelines. Owners thus avoid the pain and expense of negotiating the planning system and get close to full development value. Developers avoid the risks of buying land without planning and of having to buy consented land on the open market. However, as James Gibbs of the Exeter Land & New Homes Team points out, such a contract also means that “the developers are often your best friend until permission is secured, at which point, interests diverge. They have an incentive to argue for a low market value as they are the ones who have to pay it”.
PROMOTION AGREEMENT
To overcome this non-alignment of interests, landowners can instead choose to enter into an option agreement not with a developer, but with a land promoter. The promoter, too, will fund and run the planning process and seek to maximise value, but in return for a share of the proceeds when the site is sold. Thus, the promotor secures planning permission and then promotes the site amongst housebuilders, looking to sell to the highest bidder. This neatly overcomes the alignment issue and the fears of some owners that developers might secure planning for a lesser scheme, only to go back to the planners for more once they own the land themselves.
Which option, is the best option? James advises that it is largely down to plot size, “With a plot for just a few houses, costs and outcomes are more certain and margins smaller, so a developer builder tends to be preferable. With an area large enough to be of interest to the regional or national house builders though, I would often want an experienced land promoter with some 'skin in the game' on my side, throughout”.
