Sale Strategies and Contract Types

A critical and significant factor in achieving a successful outcome is ensuring that the sale strategy and its contract specifics are the most suitable.

Every development situation where a developer or promoter is tasked with achieving planning before a sale has different characteristics and demands a different strategy. There are a number of routes towards the ultimate sale of the site, or of realising its development potential. At Hambleden, our commitment lies solely with the Landowners.

Common to almost all agreements are some standard structural concepts that will benefit the Landowner. The following key aspects are typical in any agreement:

Developer / Promoter to be responsible for achieving a planning permission, taking on all the costs and risks for this process.
The land or property is sold following successful planning permission
The Landowner will sacrifice some portion of the value of the site in return for this service – either by a discount on the price, or sharing in the proceeds of the sale
Landowners will generally be shielded from all costs until only when and if the site is sold.
Landowners will be likely to receive a ‘premium’ for entering into the agreement. Normally, a non-refundable cash lump sum.
The agreement will last from between 5 and 15 years most typically
Continued use of the land or property is normally allowed
Landowner’s costs for entering into the agreement are typically covered by the Developer / Promoter
Many land sales will include ‘overage’ provisions – designed to ensure that the Landowner receives the benefit of any unexpected improvements to the value after the sale of the site

The following are the key contract types, although variations and mixtures are quite possible. We have wide experience of assessing, negotiating, and concluding each of the possibilities.

Option to Purchase

The Landowner enters into an agreement with a housebuilder or developer (or more than one) giving them the option to purchase the site after planning is achieved. The price is either pre-determined at contract stage, or a method of valuation is agreed and the valuation takes places after planning is achieved.

Options historically allowed housebuilders and developers the ability to speculate the costs of achieving planning, in return for exclusivity at the sale stage, and a discount to the full market value.

There are advantages and disadvantages with Option Agreements, mostly related to planning outcomes and financial returns.

Option Agreement Benefits

Option Agreement Drawbacks

Some evidence to suggest planning authorities prefer applications from housebuilders due to the final product being visible and perception of faster delivery

Once planning is achieved the purchaser is incentivised to pay as little for site as possible, often resulting in protracted and unsatisfactory price negotiations and sale process.

Established developers have significant experience in achieving planning, resolving issues, and delivering complex developments.

Price negotiations may result in lower receipt for Landowners despite better headline commercial terms.

Planning Permissions are focussed on a specific end product and therefore can be more financially advantageous.

Disagreements over valuations often escalate to arbitration, independent expert involvement, or other dispute resolution measures.

The discount on the price that developers expect can be lower than the cost of other contract types.

Developers can decline to purchase the site for any reason, requiring re-marketing of the site, and potentially repeating the planning process.

Conditional Contract

Very similar to Option Agreements, Conditional Contracts allow planning to be achieved, following which – provided planning is satisfactory as defined in the contract – the sale proceeds. In theory Conditional Contracts will compel the housebuilder tp purchase the site following planning, which provides significantly more security for the Landowner, however in many cases these contracts contain such a broad array of conditionality that housebuilders would rarely be forced to purchase the site if they didn’t want to. Conditional contracts are often used where the planning parameters are more predictable and there is less risk, for example when converting and office to residential under permissive planning policy or where planning involves minor amendments to an existing permission only.

Promotion Agreement

This arrangement devolves responsibility for negotiating Planning Permission to a promoter – a specialist company that works with Landowners to secure planning for mutual benefit. The promoter bears all the costs of achieving planning and typically pays the Landowner a fee for the opportunity. In return, the Promoter receives a share of the site value achieved, typically of the order of 10%-20%, when the Landowner offers the site for sale on the open market.

Promotion Agreements are an increasingly popular method of creating a partnership between and Landowner and a planning partner, and this is primarily due to the interests of both parties being almost completely aligned throughout the project – principally that both parties generally want to achieve the best possible planning permission and subsequently sell the land for the best possible price.

Promotion Agreement Benefits

Promotion Agreement Drawbacks

The Landowner and the Promoter are aligned to achieve the best price, removing the conflict of price negotiation problems inherent with an Option Agreement.

As the Promoter is not delivering the development, the details of the planning permission may not be optimal for the market in some circumstances.

Promoters know how to create development schemes that are attractive to the housebuilding market, enabling a competitive sale process that drives up receipts for Landowners.

Promoters (like housebuilders) are heavily incentivised to achieve planning and conclude the sale in the fastest possible time, and this can conflict with achieving best overall value for the Landowner.

As the land is typically offered to the wider market, Promoters do not rely on their own demand for housing, whereas a housebuilders’ current local pipeline or corporate strategy can influence the timeframe and valuation motivations.

The Promoter’s share of the proceeds is typically higher than with Option Agreements (though in most cases this is likely outweighed by higher sale price being acheived).

Some Promoters are additionally capable of providing infrastructure on the site – roads, utilities, community uses etc. This can result in higher overall values being achieved if the site is suitable for this strategy

Hybrid Agreement

On large sites capable of sustaining more than one housebuilder building and selling houses at any one time, this would require either a very large and experienced PLC level housebuilder to enter into and Option and purchase the whole, or a Promoter to enter into a Promotion Agreement, and post-planning the site could be sold in phases, with or without infrastructure being provided, in order to maximise value.

A Hybrid Agreement crosses this divide by allowing a housebuilder to achieve planning and purchase one or more phases of the development, with the remaining phase(s) sold on the open market.

There are several key advantages of this type of agreement. Housebuilders are very experienced at designing, securing planning, and delivering large schemes.

They also have the experience and financial standing to be able to deliver the required infrastructure across the whole development. By allowing a carefully chosen housebuilder to deliver the infrastructure and the first phase of the wider development the value of the remaining land can be significantly increased. The ability to sell the remaining land on the open market provides the competition necessary to achieve the best price overall for the site.

Hybrid agreements are complex and require a skilled professional team to design and execute successfully, including the development agents, lawyers, and tax advisors.

Joint Venture / Build Licence

Landowner who are willing to maintain an interest in the site after the planning process can partner with the housebuilder, in return for theoretically higher overall receipts. This usually involves the landowner receiving a reduced price for the land, or no price at all, in return for a share of the receipts or profits from the sale of the developed dwellings.
As this sharing of risk and reward benefits the housebuilder, and that house value increases will be captured, the value received by the landowner can be higher through use of this agreement type. Importantly, the landowner is taking on some risk, and therefore, should the development produce less revenue or profit than expected, the overall value to the landowner could be lower.

Self-Funded or Promoted

It is of course possible for a landowner to undertake the planning themselves prior to selling the site. The Landowner would take on all of the risk of the planning process, resolving any other technical, legal, or planning issues. The site could then be sold on the open market with no discount, and without a share being paid to a promoter.
On paper this would increase the overall value to the landowner, however this is by no means certain and carries significant risk.
It would be critical in this instance to appoint an experienced team of planners and the many specialist disciplines needed to promote land comprehensively, such as planning consultants, PR specialists, landscape architects, highways engineers, ecologists, to name just a few.
Typically only very small projects are self-funded, or projects where the Landowner has a special interest in the development or have significant resources available for investment.

Construction plans architectural project

Promotion as a Service

Hambleden could assemble such a professional development team, or alternatively we could procure the necessary disciplines as bundled together in what is known as ‘Promotion as a Service’.

Importance

The contract strategy used, its structure and its detail, can have the single biggest impact on the value received from a development site. At Hambleden we are very experienced in advising on the most appropriate contract types for each situation, structuring the deal in the most beneficial way, and negotiating the intricate terms of an agreement to ensure that the Landowner is protected and the returns maximised.

For a no-obligation discussion about what contract type would be most suitable for you and your project please contact us.