So you’ve struck a deal to buy a site and pass onto your lawyers the terms of the deal with the expectation that a signed contract is just round the corner to cement your preferred bidder status.
Then the lawyers burst your bubble with a series of questions: “what do you mean by that?”; “how long are you allowed to achieve that?”; and ‘what happens if …?”
For deal-doing developers, all these questions, however irritating, are a necessary ingredient for a binding contract.
Sticking points that arise during contract negotiations can be avoided in many cases if time is spent at the outset refining the basics of the deal into detailed Heads of Term (HoT). Let’s look at a few key elements of a land deal:
Land sold, land retained
If Seller owns the whole of a site and it’s all within the red line on the title plan of a Land Certificate, happy days.
Where only part of Seller’s title is being sold, attention must focus on whether, post-sale, the two separate sites will require to share any access, facilities or services. It may not be possible for these features to be documented definitely when the contract is concluded but, if they are identified, the contract can set down collaborative procedures for the design and statutory consents process for these features.
The need to share access, servicing or other facilities will require the creation of new land rights for each site, either in terms of a Disposition or a Deed of Conditions to be annexed to the contract. This is not something which can just be left to be agreed before completion – it must be agreed when the contract is signed or, the contract has to be conditional on it being signed, preferably in short order.
Title Conditions & Third Party Rights
There is still a curious tendency for Sellers to assume that the state of their title is a purchaser problem – either accept it or work round it. Whilst some wayleaves or other 3rd party rights can be treated as a design constraint, others need to be moved and there is a time and cost implication to that, particularly with utilities.
Sellers should be looking at their titles well in advance and asking their own lawyers whether they can see any impediments to development and, if so, they may be able to address them. Far better that than a whole delay whilst the contract clauses are agreed to deal with the loss of units if a wayleave can’t be shifted economically or quickly.
Price calculation & VAT
If the Seller is in any doubt as to whether land has been opted for VAT, early confirmation should be sought from HMRC as responses can be tardy and hold up deals or require drafting to cover a number of VAT variables.
For prices based on a residual land value calculation, the HoT should set out whether the headline price is based on a fixed price, a rate per developable acre and a rate per non-developable acre or a blended rate per acre. Where the relevant rate is to be determined at a future point in time, should that rate be based on a straight open market value definition or one that is more akin to greenfield value?
Any special assumptions to be taken into account in agreeing a value should be documented clearly or not only might the parties fail to reach agreement on the net price, a 3rd party expert or arbitrator may be able to do so as well.
A list of abnormal costs can run to pages and, in extreme cases, could be stretched to cover almost every cost on and offsite. Lawyers may, through experience and the wisdom of their clients, learn some of the basics on what is a true abnormal cost but it remains the preserve of surveyors and engineers amongst others to agree the list.
The rules for agreeing Abnormal Costs are often simply expressed as being an ‘open book’ assessment by the Seller which the Purchaser then has to approve; contracts have to allow for the Purchaser to be able to interrogate the figures and methodology.
Payment Profile & Security
If a site is to be paid for in tranches, the question inevitably arises on ensuring that the Seller’s right to payment of the later tranches is protected from Purchaser’s insolvency or the rights of the Purchaser’s secured lender.
There are two principal ways to protect payment; either through the grant of a fixed charge over an area of land within the site or to sell the site in land tranches to match the payment tranches. If the fixed charge route is chosen, that may lead to the need for a ranking agreement and the thorny question of whether the secured land has requisite value if it’s not yet serviced and accessible.
Suspensive Conditions & Timescales
Lastly, what are the hurdles which a Purchaser has to overcome before they will be unconditionally committed to buy the site.
Staple items are:
- securing planning permission (and other statutory consents)
- site investigation/environmental assessment
- site servicing & utilities
- any third party consent & land rights necessary for the lawful development
Other suspensive conditions may be appropriate for the deal and should be set out in the Heads of Term.
In each case, it is important to detail the timescale for achieving the condition and what happens where there is unavoidable delay or appeal. Also, it should be made clear whether a suspensive condition is there for the benefit of the Purchaser alone or, whether the Seller has a vested interest in one of the Suspensive Conditions.
Get in touch
If you would like to discuss these, or any other issues related to site acquisition for development, please feel free to get in touch with a member of our team.
Call us for free on 0330 912 0294 or complete our online form below for legal advice or to arrange a call back.