Property Development

An option agreement is a contract under which a buyer is granted the right to buy a property by the landowner for a defined period of time (the ‘option period’). It is favoured by developers as it requires much less commitment and gives greater freedom than a conditional contract. A seller needs to be happy that it is tying up its land for the option period without certainty of a sale, which may not be ideal in a falling market.

Often an option fee is paid, which the landowner may retain whether or not the buyer exercises the option. The buyer is not obliged to buy the property but can choose to exercise the option during the option period by serving notice on the landowner.

Exercise of the option creates a second binding contract to buy the property and usually a deposit is paid at that point. On the agreed completion date, the balance of the price will be payable.

An option allows the buyer to secure the property, preventing sale to a third party, whilst it assembles a larger site and/or seeks planning permission. The buyer will still have to incur legal fees, planning costs and time that will be lost if it does not acquire the property, but better that than being obliged to buy a property that it cannot develop. Whether a developer uses an option agreement rather than a conditional contract is a matter of negotiation with the landowner.

A conditional contract is a contract under which a landowner agrees to sell, and a buyer agrees to buy, a property, but where completion of the transaction is conditional on the occurrence of some event.

Conditions include the seller obtaining vacant possession (perhaps a lease surrender by a tenant), completion of works, the seller buying the property itself, or the obtaining of a satisfactory planning permission in the case of a development transaction.

A conditional contract allows a developer to secure a property from disposal to a third party but will include greater commitments to obtain planning permission and buy the land if this is granted. This is the key difference to an option agreement. The obligation to buy the property will usually take effect once satisfactory planning is granted and the six-week period for judicial review has passed.

The developer should negotiate a list of ‘unacceptable conditions’ that may be imposed by the local planning authority on the planning permission that will allow the buyer not to proceed. There may be the ability to appeal a refusal of planning permission or such conditions; sometimes this may be an obligation if it is likely to succeed.

If a satisfactory planning permission is not granted before a specified longstop date (which may automatically extend, to an extent, until the planning process is complete), then the parties will usually have the right to terminate the contract.

Overage (or clawback) represents a contractual obligation by a buyer of land to make extra payments to the seller after completion if certain ‘trigger events’ occur. A trigger event might be the grant of planning permission, the carrying out of development, or sale of the land – usually something that adds value to what was anticipated at the point of sale.

For example, the price for the land may have been calculated on the size of the development permitted by a certain planning permission, say, a price per square foot of residential accommodation. If the developer obtains planning permission for a larger development after completion, overage could allow the seller to share in the increased value by obliging the buyer to pay the seller a sum equal to a percentage of the increase.

Overage is more common on larger developments where there is greater scope for things to change post-completion. The terms would usually be contained in the transfer deed or a separate overage agreement or deed.

As overage is a positive obligation to pay money, it cannot attach to and pass with the land. A seller will need additional protection so that the buyer does not sell the land on and circumvent the overage. The most common method of protection is for the seller to register a restriction on the title at the Land Registry, preventing anyone from registering a disposal, and the document to include an obligation for the buyer to obtain a deed of covenant from anyone it sells the land to.

The seller will need to provide certificates for the Land Registry to register ‘permitted disposals’, for example the sale of completed units, grant of rights to a local authority as part of the development, a mortgage for development finance, or where a deed of covenant is procured from the buyer.

Our property development solicitors can help you navigate the complexities of overage agreements.

A section 106 agreement (or S106 agreement) takes its name from that section of the Town and Country Planning Act 1990. The section allows a local planning authority to enter into an agreement with a developer restricting the use of land, requiring certain activities, operations or use of the land, or requiring sums of money to be paid. These provisions must be necessary to make a development acceptable in planning terms.

A S106 agreement is linked to a particular planning permission – most of the terms will apply only if that planning permission is implemented. It is separate from any Community Infrastructure Levy that may be payable for a development.

Obligations in a S106 agreement can cover a wide range of things, such as:

• Payment of a sum of money in lieu of the development incorporating an amount of affordable housing or open space
• Payment of contributions for education, play or leisure facilities
• A restriction on the owners and occupiers of completed residential units from obtaining parking permits in the area
• Terms governing how much affordable housing is provided and in what mix
• Requirement for a travel plan and its approval

A promotion agreement is a contract between a landowner and a ‘promotor’. The promotor typically agrees to apply for planning permission for a development of the landowner’s land and market the property for sale. In return, the landowner will pay the promotor a percentage of the net sale proceeds as a promotion fee (in addition to reimbursement of its planning costs).

Planning is a specialist area and most landowners will not know how to navigate the system and maximise the value of their land. Promotion agreements allow them to benefit from the promotor’s expertise and financial resources to realise the development value in their land.

We have wide experience in acting for clients on development transactions in the South East and further field.

For developers, we offer a solutions-focussed service and can handle site assembly and acquisition, development finance, the grant of easements to utility companies and S106 agreements. Our Residential Property team then take over and deal with the plot sales and completed units providing an end-to-end service.

We are experienced in dealing with development finance, including where multiple lenders are providing funding. Lenders’ solicitors have praised our organised disclosure of documentation for a smooth process.

For private sellers, we assist with granting options over land ranging from part of a garden to a farm, sales that are conditional on the grant of planning permission, and unconditional sales.  We can guide you through the intricacies of overage agreements and promotion agreements.