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Show me the money! Residential property market scrambling to secure land for developments

Robert Sprake - Excello Law

Once the lockdown restrictions eased during summer 2020, the UK housing sector experienced a mini boom. Far from damaging the property market, the lockdown had both exacerbated pent-up demand for property while also kindling a fresh demand for properties outside city centres, especially dwellings with a garden or a spare room for a “wok-at-home” office. Simultaneously, the government proposed a radical overhaul of the planning system, which promises to free up more land for major housing developments.

UK developers are currently taking Mark Twain famous advice to, “buy land, they’re not making it any more”. In anticipation of significantly looser planning laws, developers are now scrambling to secure suitable land for development. Landowners are therefore being approached with very attractive offers. However, these offers often come with strings attached. Some developers wish to effectively secure an option to develop land in the future, should planning be obtained and the market remains favourable. Other developers are willing to purchase land where permission is in place, but they often want to defer a substantial proportion of the payment for it.

For example, a housing developer might offer to buy land from a farmer for £10 million, to be developed for housing. However, This attractively high offer comes with a caveats: More and more frequently the developer wants to make the payment in a number tranches spread over five years. (Typical arrangements vary between 2-5 years, usually involving 3 or 4 tranches of payment.) The developer may (with good reason) justify spreading out the payment by citing cashflow issues or uncertainty around planning permission or the timescales involved. Yet if the developer goes bust, the landowner may be unable to obtain the contractually agreed payment unless they have certain security protections in place. In such a scenario, how can the landowner best protect their interests?

Landowners can protect themselves in several ways. Firstly, the sale could be structured so that it does not complete until all the payments are received. If that cannot be agreed, the landowner can be protected by placing legal charges on the land, which may enable it to be recovered in whole or part in the event of non-payment. Land Registry restrictions could also be placed on the land. It may even be possible to hold back a few houses, or a strategic part of the site, as security against non-payment by the developer.

Where deferred or staged payments are agreed, the landowner should also ensure that they will not be adversely impacted by tax liabilities. There is a real risk that the landowner may become liable for the full Capital Gains Tax (CGT) – as calculated on the total purchase price – at the time of legal completion. However, if staged payments are in place, the seller  may only have received part of the proceeds of sale and so may not have enough to pay the CGT bill.

For its part, the developer will understandably want to ensure that any mechanism of security being used won’t hold up its plot sales or slow up the conveyancing process to the end user. In terms of how a staged payment deal is structured, the needs of the landowner and the developer can sometimes seem to be in direct opposition. However, it’s important that the parties do not lose sight of the fact that a mutually beneficial one should be attainable. When the respective parties’ advisors take a positive, collaborative approach, it is usually possible to find a solution which works to the benefit of both parties.

Negotiating a workable deal invariably requires trust. Sharp practice by some developers (and occasionally the landowner!) can result in deals breaking down. Too often, the developer’s request to defer part of the payment comes after an option or contract has already been exchanged. Sometimes, a developer may attempt to present the landowner with a fait accompli in terms of the payment structure. It’s therefore advisable for landowners to obtain expert legal and tax advice early. Landowners are often unfamiliar with the tactics used by developers. In order to negotiate a favourable deal, landowners need to work with advisors who have recent experience acting for both developers and landowners. Even where the buyer and seller’s expectations are not completely aligned at the outset of a negotiation, good agents and solicitors can create solutions which work to the benefit of both parties.

Robert Sprake is a specialist lawyer in real estate and residential property development  at Excello Law

www.excellolaw.co.uk

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BDC 317 : Jun 2024