Land News

Avoiding the pitfalls when homing in on a land deal

Aberdeen Press & Journal 20th November, 2004

Last month, the Scottish Executive unveiled an ambitious three-year plan to pump GBP1.17billion into developing 21,500 affordable homes across Scotland. Under the plan, housing approval rates are set to increase by a third from the present 6,000 homes per year to around 8,000 in 2007/08.

In particular, the executive plans to boost the rate at which new homes for social rent are approved for construction, and allow a massive expansion in support for low-cost home ownership, with 5,000 homes to be approved over the three-year period.

This will of course be good news for people on low incomes or without a permanent home at present, as well as first-time buyers needing help to get on to the first rung of the property ladder. In turn, there could be benefits for rural communities if it also means that young families and essential workers find it easier to buy or rent homes in villages and small towns in the countryside.

With such a clear expression of Government backing to spur them on, land-hungry developers will undoubtedly now be redoubling their efforts to secure potential development sites.

Selling land for housing development may seem straightforward and something anyone with commonsense can do, but in fact the road to riches is littered with pitfalls for the inexperienced. If your land is identified in the local plan for residential development, then a straight sale can be agreed.

If your land is not identified in the local plan, but has potential due to being close to a village or town, then you should consider entering into an option agreement with a developer. This is an increasingly common legal agreement to sell to the developer subject to them achieving planning consent.

In 1999, for example, Bidwells was overseeing just three plots under option agreements, totalling some 200 acres. Now, we have about 1,220 acres of land under option agreements on 24 sites - almost all in the central belt.

If all these sites were to be developed, they could accommodate as many as 10,000 houses, or almost half of the executive's target for the next three years. Not all of these sites will become actual housing developments, of course; in very rough terms only about half of them will ultimately be built on.

Another factor to bear in mind is that local authority planning departments often require as much as 20-30% of a development to comprise affordable housing of the kind the executive is now promoting.

Provisos aside, it is clear that many landowners may soon be receiving approaches from developers proposing option agreements.

The golden rule is: don't rush to accept the first offer. You should seek early advice as the terms can differ and may put you at a disadvantage when closing the deal in years to come. Most developers will almost always pay a major contribution towards the owner's professional fees.

The main ingredients of an option agreement are the time span, the option payment and the sale price. The term should be long enough to allow the developer to win consent but not so long as to let him become complacent or "freeze" the land out of the market. The term is normally between five to 10 years and extendable in certain circumstances.

The option payment should be large enough to demonstrate the commitment of the developer and not refundable if planning consent is refused.

The price of the land is the most fickle ingredient because you are trying to anticipate what the value may be some years hence. We advise a choice of value formulae so the landowner is protected from unexpected movements in value.

The choice can be a percentage of the open market value at the time of exercising the option; a percentage of house sale value; a mixture of both of these values; or today's price linked to an appropriate housing index. Other factors to be considered in the agreement are infrastructure costs and planning gain issues.

The value of the land will to a degree be determined by the number and type of houses that can be built on the land. To maintain an element of control over the development and to help maximise its value, we advise the preparation of a development brief in conjunction with the local authority. The land should then be offered for sale either by private circulation to selected developers or on the open market.

All in all the sale of housing land is far from straightforward and some deals can take several years to complete. Patience, planning and price protection can pay significant dividends.

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