This is the third article in our series on capturing the development value of land left to charities as gifts in a will.
Options can be used to in the alterative to promotion/development agreements as a means to harness the development potential of land where that planning or development potential is uncertain or more likely to be achieved in the slightly longer term. Options are often used where land has medium-term planning potential, where development agreements would be used for more immediate prospects, and overages for prospects are likely to arise even further in the future.
An option gives a developer the right to acquire land at a later date, often subject to pre-conditions such as the developer obtaining planning permission. Such mechanisms allow landowners to give potential developers sufficient interest in the land to allow them to invest in exploration and crystallisation of its development value. This is useful where land is being disposed of by personal representative,s as such parties have no obligation to invest in improving the development potential of the land. Whilst personal representatives are not then obliged to hold the land until the option is exercised and could sell subject to the option, most commonly such land will be transferred to a nominee to hold until the option is exercised with a view to the beneficiaries enjoying the uplift created by the planning potential.
Options have the following key features:
- They secure a developer the right to purchase land;
- That right will last for a fixed period.
- The landowner covenants not to make disposals or take certain actions which are inconsistent with the principles of the option;
- They include covenants for the developer to obtain planning permission and a timetable for them to do so; and
- They include a mechanism for calculating the eventual purchase price.
The provisions around planning often give a developer quite a lot of flexibility as to what permissions they apply for, subject to an obligation to maximise the planning permission achieved. To balance this, the landowner can include parameters within which the developer needs to work in relation to the submission of a planning application.
The purchase price is often not fixed when the option is entered into, but a mechanism for calculating it will be included (typically based on the open market value once planning permission has been achieved). The parties can include a minimum price to protect the landowner.
A developer will generally pay a fee for entering an option. This initial fee will usually, however, be low or nominal: This means that charitable beneficiaries will not see the majority benefit of the land's value until the option is exercised or the land is otherwise sold. In this respect, it is worth noting that once the option period expires, the landowner is free to sell the land regardless of any investment made by the developer in the interim. Invariably, however, a developer will ensure that where they have invested, they acquire the land. Obligations to obtain planning are key in this respect, as an option could otherwise simply delay sale without the benefit of eventual uplift in value.
Jo Gardner commented that;
"A developer will usually also cover any professional fees incurred in entering an option, including any fees for legal advice, surveyor input or accountancy fees. These fees are usually only recovered if the developer obtains consent and acquired the property".
All the mechanisms discussed in this series aim to capture future development value. In our second article, we considered overages which are imposed on the sale to other (often non-developer) landowners so that planning achieved at a future date still benefits the seller by way of the right to an additional payment, often amounting to circa 30% of the uplift in value
The end result of an option for charitable co-beneficiaries left land in a will can be similar to a sale coupled with an overage. However, where short-medium development potential is identified, direct sale to developers via an option is typically more attractive for both the landowner and developer. This is because a developer only has to invest in seeking planning but does not have to incur the cost of purchasing the land upfront, and the landowner will benefit from a much larger percentage of the development value following consent, perhaps amounting to 80-90% of the market value.
Of course, the significant advantage of an option for landowners is that they themselves do not have to incur the outlay or risk of seeking planning permission. The landowner also benefits from the developer's expertise in bringing the land forward for development, thereby maximising the land's eventual sale value and the return enjoyed by the beneficiaries.
It is worth noting that there is also a form of option which allows a party a right of first refusal to acquire land. This is known as a right of pre-emption. Such rights are commonly granted between adjoining owners who may be collaborating to develop their respective land or in relation to land adjoining a main site, but which is less of a focus for development. Such rights can be combined with other forms of agreement, including options.
It is often worth considering imposing an overage in parallel to an option agreement: This deters developers from unfairly profiting from a future enhanced planning permission achieved after the option has been exercised (and which has not been factored into the purchased price pursuant to the option).
The decision whether to enter into a promotion or development agreement, grant an option, or simply sell with an overage imposed over the land will come down to some factors:
- How certain the planning position is (overages are generally more appropriate where the planning permission is least certain; development agreements where it is most certain and options in the middle ground);
- The size, scale and location of the potential development;
- Whether the beneficiaries are willing or able to hold the land for a period of time;
- How quickly the beneficiaries wish to generate a return; and
- Whether the beneficiaries wish to take a more or less active role in the development process.
Charities should take careful advice as to which mechanism to adopt. Please see the other articles in the series below:
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