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Options and Overage Agreements Crucial for Land Banking Options and Overage Agreements Crucial for Land Banking

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Mar 13

Options and Overage Agreements Crucial for Land Banking

Written by Options and Overage Agreements Crucial for Land Banking

Quietly, behind the scenes, well-known national building companies are buying land or taking options over it.

They have recapitalised their balance sheets and are rebuilding their land banks in preparation for a building frenzy in anticipation of future planning permissions.  The local Planning Authorities have Government targets to meet and, to date, they are behind schedule so be prepared for fairly large scale developments being approved.

When a landowner grants an option the developer will usually be required to use reasonable endeavours to obtain planning permission.   The option can therefore be an appropriate and proactive vehicle for the short term – say, land that will be developed in three to five years’ time.

But when the ‘hope value’ is not likely to be realised for many years an overage agreement may be more appropriate.  This is where the landowner has the right to receive further payments if and when certain events occur, such as the grant of planning permission.

Typically, a farmer will sell land to a developer for its agricultural value with the right reserved for the farmer to receive an additional sum in the event that the developer subsequently obtains planning permission.

I see this as a defensive action because the landowner is protecting a proportion of the ‘hope value’ whilst obtaining full value for the land based on its current use.

The amount of the overage payment will usually be calculated by reference to a formula such as (A – B) x 50% where ‘A’ is the enhanced value of the land with the benefit of planning permission and ‘B’ would be the original cost value of the land to the developer.  In this example, the percentage would result in the uplift being shared equally between the landowner and the developer.

There are traps for the unwary and it is essential for the landowner to employ land agents and lawyers with the right experience as you can guarantee the developers will have the right advisers looking after their interests.  I have four key tips.

Primarily, the developer may require costs be deducted from the overage payment such as the costs of obtaining planning permission.   I try to negotiate away such an unknown quantity as it should be what the developer’s share of the uplift is for.

Secondly, there is often argument as to whether the overage payment should be triggered by the grant of planning permission or implementation.   There can be a significant time lag between the two, especially if the planning permission has conditions attached which are unacceptable to the developer.  There are also cash-flow implications.  I believe the trigger should be the implementation of planning permission.  It is the fairer option and if you negotiate too strongly the developer may walk away.

Thirdly, the landowner should be aware that the developer may obtain a low value planning permission at the outset and then enhance it further.  The agreement should provide for additional payment to the landowner accordingly.

Finally, the overage period could be as long as, say, 50 years so the landowner must take adequate steps to ensure the enforceability of the overage obligation on subsequent owners.

With appropriate expert advice your investment should be sound for the future.

William Kinread is a partner at Raworths LLP and a solicitor specialising in agriculture. To contact Raworths telephone 01423 566666 or visit our offices at Eton House, 89 Station Parade, Harrogate, HG1 1HF. Alternatively, you can email william.kinread@raworths.co.uk

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