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Land – The Best Option Land – The Best Option

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Jan 12

Land – The Best Option

With the worldwide population now exceeding 7 billion and with the likes of China and India consuming more and more protein, the value of soft commodities has been soaring.   Following in the footsteps of oil, copper and iron ore, the upwards trend has spilled over into the likes of cereals, soya and pork bellies.  Farmers’ incomes have improved and this greater income yield has encouraged a rise in the capital value of agricultural land.  Certainly in Yorkshire, land is regularly fetching upwards of £10,000 per acre and not so long ago it would have been considerably less.   And there is no shortage of finance.  The banks are falling over themselves to lend.  Head Office has given farmland the green light.

Contrast this with development land.  Long gone are the days when obtaining planning permission was like winning the lottery.   Land that would regularly attract bids in excess of £500,000 per acre simply does not sell.   Vendors are not going to give their land away but developers struggle to get finance for even the most attractive of deals.  The banks are up to their necks in property.  They are deleveraging their balance sheets and Head Office says ‘no’.

However, times change and planning use does add value and it is in the interests of every landowner to discover the full potential of his land.   This is where good professional advisers earn their keep with the use of vehicles such as option and overage agreements.

Broadly speaking, an option agreement gives a developer time to explore the planning potential without being committed to buy.  Only if he can make the deal stack up will he exercise the option.  However, during the option period the landowner is prevented from selling to anyone else.   Two points for the landowner.   The developer should pay an option fee for the benefit of the option and the landowner should resist any suggestion that this is deducted from the eventual purchase price.   The fee is consideration for exclusivity.  Secondly, many option agreements allow the option period to be extended if the developer is awaiting the result of a planning application or an appeal or the determination of a host of other uncertainties.   This again should be resisted.   The landowner wants the option to be exercised so two years should mean two years.

When the parties enter into the option agreement they will have a future use in mind but during the planning investigations this use may change.  For instance, I recently acted on the sale of land at £75,000 per acre as amenity land adjacent to a building site.  But what if the developer applies for a more intensive development?   This could result in houses being built on land valued as open space or service strip.   This is where an overage agreement gives the right for a landowner to receive further payments if and when certain events occur.

There are many different formulae but often the additional payment will be a percentage of the uplift in value.   £75,000 per acre may sound a lot but it is peanuts compared with the value of building land even in this post-credit crunch era.

Of course this article only scratches the surface of many issues but my advice is that these are serious times and landowners need serious advisers.

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