Options are an option
It is a long time since I can recall quite so much construction work going on in the North East.
Our road infrastructure seems to be getting a major, if frustrating, overhaul and new housing sites are actively being developed in our cities, towns and even rural villages. With the regional jobs market seemingly perky, this situation could continue for some time.
With developers hungry for sites, and banks still being hesitant in lending for residential development, Option Agreements are often being offered as a means of facilitating the purchase of development land. In essence, an Option Agreement allows the developer to purchase the option to buy the land within a fixed period of time for an agreed price. Like all legal documents, an Option Agreement needs to be considered carefully, and legal advice sought, prior to signing. But what should you look out for?
Firstly, you must be confident that you are completely happy with the proposed outcome of the development, including consideration of local feelings. This may seem obvious, but I can think of several landowners who signed Option Agreements in the early days of wind farm development, who later wished they hadn’t.
You must also look carefully at how the purchase price is calculated. Is it £s/acre for the whole site, or has there been a percentage reduction to reflect that some areas within the site will remain undeveloped? Does the option extend to the entire site, including boundaries? It is not uncommon for developers to leave out areas that they may see as future liabilities.
If the Option involves staged purchases of a large site, how is this to be organised and valued? There can be a danger that early stage development can devalue part of the remaining site. This could be by restricting its use in the short term ie by restricting agricultural access, or by reducing its long term capital value ie by creating a ransom strip.
The length of the Option is also important. The usual length is 3-5 years, but may well contain provisions to be extended if the developer is still in the process of obtaining planning consent. Will such longer term arrangements tie in with your plans, particularly if land transfers are being considered?
An obvious drawback to the Option approach is that there could be a lack of urgency on behalf of the developer, even if there are obligations to avoid this included in the agreement. Such obligations can be hard to enforce. If the market turns, a developer may drag his feet. If rapid capital release is required, a Promotion Agreement may be better. This would be signed with a land developer who would seek planning consent and then sell the site. They would be paid a percentage of the value, normally c20%, only on sale of the site. Thus their objective is to maximise value as quickly as possible.
As stated earlier, whatever the approach, taking professional advice is essential. With most developers happy to fund Land Agent and legal fees, there really is no excuse.
If you would like any further information or to discuss any rural related matter, please contact Tom Wills, head of the agriculture & estates department at Sintons.