It’s great once you get there but it’s a long journey and often a rocky road. Wear your seatbelt, warns Nick Woolley.
Increasing demand from property developers and house builders means that farmers considering selling land to release capital generally have little trouble attracting suitors. The potential rewards can, of course, be great but the planning process is long and fraught with danger to landowners who are not adept in the vagaries of planning law and alert to the hard core practices of many developers.
I’ve worked with many landowners over the years who feel let down by planning laws, but the hard fact is that they have often contributed at least partially to their downfall by embarking on the journey ill-prepared or poorly advised. When you’re up against the big boys, it pays to prepare well. No mercy will be shown to a novice. One astute farmer told me recently how a developer told him a £6 million offer for his site was more than generous. The farmer, who is more attuned to land values than many, went elsewhere and, six months later, sold the same site for £30m million.
Landowners and developers have one thing in common when it comes to land: the desire to make a profit. This aside, their agendas are entirely different. You as a landowner will generally want as much money as you can get – and as soon as you can get it.
Developers, on the other hand, want to make the most money they can out of their overall land banking and option holdings. They will invest in highly experienced and top dollar advisers to ensure they achieve it. They are likely to have a range of land options in a particular region and, if an unsuspecting landowner has signed an ill-advised agreement, he could find that the developer he’s signed the deal with never actually gets planning consent for his land because one or more of his other sites in the locality are promoted as they appear more likely to obtain early consent.
As a result, I’ve seen landowners left high and dry because the developer they had an agreement with won’t buy their land because he’s bought the other consented site elsewhere – but they are precluded through their agreement with him from selling to anyone else or even developing it themselves. Their land remains tied up and completely useless to them for the duration of the option.
The moral here is that at the journey’s start you should not enter into a straightforward option agreement with a developer and should look at the restriction clauses to both parties very carefully. A conditional contract is actually a far a better way to go as it not only commits the developer to use his ‘best endeavours’ to take forward the process of securing planning permission as quickly as possible, often in accordance with clear target dates, but also requires him to purchase as soon as consent is obtained.
Once you get to the milestone stage in your journey where a developer has achieved planning permission and wants to buy your land, he will then want to agree what he proposes to pay you for it, using his ‘Price Notice’. This depends on many factors and inevitably involves multiple and highly confusing ‘deductions.’ It requires tough negotiation and an in-depth understanding of the complex issues involved by the negotiating agent, both in the initial conditional contract negotiation as well as at the actual negotiation of the Price Notice.
One key element for consideration is, of course, the gross value figure per acre that land is worth with consent in that area. The other key element is the actual size of the piece of land, gross and net – ‘net’ being the actual developable area, once land required for landscaping, public open spaces and infrastructure has been taken off.
The more of the site the developer can exclude from the gross area in the initial negotiations, the more he can reduce the final net price paid. For instance, he will not only seek to exclude costs for Section 106 Planning Obligations, which is normal, but also as much land as possible for roads or other major infrastructure, as he won’t make money out of them. Affordable housing plots will, at best, deliver low values. Some developers are more generous than others, so it’s important to be on your guard and to study the small print before you finalise a deal. Be aware that as much as 50% of the total acreage can be wiped off the overall size of the site in net terms by the time undevelopable land is discounted.
Another key element is the actual location of the land and the expense required actually to develop it – for instance a site with main services at some distance will cost more to develop, as will a site where major road works on the public highway are deemed necessary for access to a large development. In an area where the inherent value of development land is lower, these deductions will have a far greater impact when taken off the gross value of the site. As an example in our region, land is more valuable around Cambridge than, say, in the depths of rural Norfolk, although some deductions will cost the same in both locations.
Finally, the developer will take into account the number of houses and their size that he reckons he can squeeze onto the site. The value of land intended for sizeable plots for larger detached buildings is likely to be less than that for a site which will be used for a larger number of smaller, more easily marketable buildings, where the off-site developers’ costs can be spread over far more units.
So, the process of getting to journey’s end and agreeing a price won’t be easy and you’re likely to face a barrage of reasons why the price of your land should be reduced and reduced. As if the existing ‘deductions’ were not enough, the Government’s proposed plans for a Planning Gains Supplement, or alternative, as the Chancellor hinted last week, are likely to take a further slice off the overall profit – a slice that will almost certainly, ultimately come from the landowner’s ‘cake’.
As I said at the start, I’ve worked with many landowners over the years who have felt hard done to by developers and I’ve also resolved complex messes, many of which could have been avoided if original agreements had been better drawn. The fact is that while the challenges facing landowners trying to release land are many, they can usually be reduced and made a good deal less stressful with support from advisers who know their stuff.
Of course, it costs to invest in a good agent and solicitor, who understand the in-depth issues involved and can demonstrate a successful track record. But it’s false economy to think you can deal with developers, who make a point of employing first rate and highly paid advisers, without investing in proper advice. The problems you may create for yourself, if you are not fully prepared, can prove at best expensive and at worst, disastrous.
These days we never drive anywhere without a safety belt because we understand the devastating results our failure to wear it could cause us. Embarking on the risky journey to sell land to a developer without your own ‘safety belt’ of proper advice and thorough preparation is equally dangerous. Wear it and your journey along the road to land sale profits will be safer and should ensure you arrive in better shape!
Anglia Farmer | December 2007December 5th, 2007