Property developers are canny business people who have a number of clever ways of getting hold of land. If a developer approaches you with what seems to be a good deal, step back and look at it closely. Sometimes it’s little more than the illusion of a pot of gold at the end of the rainbow.
There are five types of deal a developer may offer. In each of the first three there is no certainty that the sale will go ahead.
1 An Option: ‘the Pot of Gold’
An option to buy land does not put any commitment on the developer to go ahead and buy but has the effect of ‘sterilising’ the land and taking it off the market.
While an option to buy a bit of garden at an inflated price may appear attractive to the landowner it is meaningless if the option is never exercised. A landowner should always ask for a conditional contract rather than an option.
2 Right of first refusal
A pre-emption agreement is a right of first refusal to buy land but only if the landowner decides to sell. Unlike an option the developer cannot force the landowner to sell. If the landowner decides to sell then the developer can require the sale to be to them.
3 A Conditional Contract
From a landowners viewpoint a conditional contract – obliging the developer to go ahead if the conditions are met is far better than an option.
But beware of weasel words - if there are too many conditions on the contract - which are unlikely to be satisfied then effectively the developer has effectively created an option.
4 A Sale with Overage –‘Clawback’
This is a sale of the land at its current market value but with the provision that if something happens in the future – for example planning permission is obtained - then further payments are due and there is a ‘clawback’ on the increased value of the land.
5 A Straightforward Sale
From the landowners viewpoint a simple sale of the land at market value with no ongoing involvement with the developer may be the best solution. It’s also the one the developer is least likely to offer.
If you get involved in any of 1,2 or 3 always bear in mind the following points:
- Make sure the developer pays you a substantial sum up front on entering into the agreement. The effect of all of these is that you have limited what you can do with the land for the period of agreement.
- Keep the period of the agreement as short as possible
- Where the agreement specifies a price for the land (remember the sale may never go ahead) this should always be the greater of the specified price or market value at the time the sale goes ahead.
- Make sure you take legal advice.
- Remember the basic principle of all property transactions: ‘get before you give’.
Keep your options open, never enter into an option agreement, and make sure the deal you get is the one you want.
If you have any questions, please get in contact with me!