In this article, the commercial property solicitors at Harper James highlight some of the challenges involved with sourcing and financing land that is intended for development. We walk you through the steps involved in the purchasing process from initial negotiations to completion and beyond, before we explore some of the common risks involved.
Contents:
Identifying suitable land for development
Location: Ideally you want to target an area with strong market demand and growth potential. Proximity to amenities such as schools, shops, transport links, and employment opportunities is particularly desirable for residential developments.
Accessibility: Consider ease of access and transport links to the site, including road, rail, and public transportation. Proximity to major highways or motorways can enhance connectivity and attract potential buyers or tenants.
Infrastructure: Availability of utilities such as water, electricity, gas, and sewage systems are essential for development. If the land is located in an area with inadequate infrastructure, the cost of bringing in these services may impact the project's feasibility.
Site Conditions: Evaluate the physical characteristics of the land, including factors such as topography, soil quality, drainage, and flood risk. Steep slopes, poor soil conditions, or high flood risk may require additional engineering or mitigation measures, which can increase development costs.
Planning and Development Potential: Review the local development plan to gain insights into what can be built and any potential limitations.
Market Demand: Assessing market demand for the type of development you are planning is key to help determine the profitability of your project. Consider factors such as the demand for residential or commercial properties, the target demographic, and competition in the area.
Environmental Considerations: Consider the impact of your development on the surrounding environment, including any protected areas, wildlife habitats, or ecological considerations. Compliance with environmental regulations and sustainability is increasingly important in property development.
Financial Feasibility: Consider the acquisition cost of the land, development costs, potential returns, and any financing options available. Conducting a thorough financial analysis and feasibility study helps determine whether the project is financially viable.
What are the different ways to finance the purchase of land for development?
Development Finance: Development finance is tailored to fund the acquisition and development of land. It usually provides funds for the purchase of the land, as well as the construction costs. Development finance is typically structured as a loan, and repayment terms based on the projected value of the completed development. Lenders may require a detailed development plan, financial projections, and collateral to secure the loan.
Bridging Loans: Bridging loans are short-term loans used to bridge the gap between the purchase of the land and availability of long-term financing. These loans are typically used when there is a need for quick funding or when traditional financing options are not immediately available. Bridging loans are secured against the land or other assets and have higher interest rates compared to traditional mortgages. Once the long-term financing is secured, the bridging loan can be repaid.
Private Equity: Private equity firms or individual investors may finance a development project in exchange for an ownership stake or a share of the profits. This can be a suitable option for developers who have a solid track record and compelling investment opportunity.
Joint Ventures: Joint ventures involve partnering with another party, such as a landowner and investors, to join funds, expertise and resources to finance the development. The profits and risks are shared and outlined in a joint venture agreement. This requires a clear understanding of each party's roles and responsibilities.
The availability and terms of finance may vary depending on your track record in development, the project's viability, and current market conditions. It's advisable to consult with your financial advisors, accountants, lenders and experienced property development finance solicitors to explore the most suitable financing options for your specific project.
Due diligence before the purchase
Thorough due diligence is essential to ensure the land is suitable for the intended development and identify any potential risks. Common checks include:
- Searches: property searches gather information about the land and its surroundings. Common searches include local authority searches, environmental searches, drainage and water searches, and mining searches. These provide information on planning history, potential contamination, flood risk, rights of way, and other factors that may affect the development.
- Title Checks: a thorough examination of the land's title is essential to verify ownership, identify and address any restrictions or encumbrances. It may be possible to obtain undertakings or arrange insurance to protect you against any title defects.
- CPSE's (Commercial Property Standard Enquiries): CPSE's are a set of standard questions raised by the buyer's solicitor to gather valuable information from the seller about the land. These enquiries cover a wide range of topics, including planning permissions, building regulations, rights of way, utilities, and any ongoing disputes.
- With or Without Planning Permission: If the land already benefits from planning permission for the intended development, it provides certainty and reduces risk (albeit if this is the case this will be reflected in the purchase price). Otherwise, carefully evaluate the likelihood of obtaining planning permission, the associated costs and timeframes.
- Site Surveys: Commissioning site surveys, such as topographical, ecological, or geotechnical surveys, can provide valuable information about the physical characteristics of the land and any potential constraints or risks.
What is the process for buying land?
While each property transaction is unique, a basic overview of the sale and purchase process involves the following steps:
- Initial Negotiation
Heads of Terms
The process begins with negotiating Heads of Terms for the sale and purchase. This non-legally binding document serves as a framework for the transaction and outlines key commercial terms agreed between the parties, such as the purchase price, deposit amount and any specific conditions or contingencies. While commercial real-estate agents often put terms together, it is wise to involve your legal team at this early stage. We can provide negotiation support to ensure the terms protect your legal and commercial interests, accurately reflect your intentions, and highlight any risks. This stage can take several weeks to finalise, depending on the complexity of negotiations.
Option Agreements
Many developers are keen to secure land for a proposed project but may not be ready to commit to the full purchase. An Option Agreement is a good solution. This is where the seller grants you an exclusive right to purchase the land within a specified time period, usually at a predetermined price. During the option period, the landowner cannot sell the subject land to another party, allowing valuable time for you to assess its suitability or obtain necessary planning consents. A non-refundable option fee is often payable, which usually represents a percentage of the purchase price. If you exercise the option, this triggers the full purchase process. Otherwise, it expires, and you forfeit the option fee. - Due Diligence
When Heads of Terms are agreed, your solicitors will kick-start the due diligence process. This typically involves conducting searches, reviewing title documents, assessing planning permissions (if in place), and gathering relevant information to check the suitability and viability of the land.
Depending on the project’s scale and complexity, and any potential issues identified, this stage can take anywhere from several weeks to several months.
Obtaining planning permission can also significantly impact the timeframe - the planning process involves submitting applications, consultations, and potential appeals. - Formalising the Sale and Purchase Agreement
Alongside due diligence, your solicitors will be busy liaising with the seller’s legal team to prepare, negotiate and finalise the Sale and Purchase Agreement. This core document incorporates the Heads of Terms, as well as any specific conditions, warranties, and obligations related to the sale and purchase. Timeframes depend on how quickly both parties can come to a mutual agreement on the terms of the deal. Choosing commercial property lawyers that are commercial in their approach is key to concluding this segment of the transaction. - Exchange of Contracts
Once terms are finalised, the parties sign identical copies of the Sale and Purchase Agreement, set a date, and proceed to exchange contracts, at which point the transaction becomes legally binding. The buyer usually pays the deposit on exchange, and a completion date is agreed, allowing time to fulfil any outstanding matters, draw down finances etc. - Completion
This is when the remaining balance of the purchase price is paid, and the buyer takes legal ownership of the land. Exchange and completion can happen on the same day. - Post Completion
After completion, the buyer’s legal team normally applies to register the purchase with the Land Registry. This ensures your ownership rights are recorded and protected (please see the note below regarding SDLT) - Ongoing Obligations
Once legal ownership is transferred, there may be ongoing obligations to the seller, often as a result of Overage Agreements. Also known as clawback or uplift agreements, these provisions entitle the seller to receive additional payments if certain conditions are met in the future. For e.g., if you obtain planning permission for additional development on the land, the seller may be entitled to a percentage of the increased value. Overage agreements are typically negotiated and included in the Sale and Purchase Agreement. - Expected timelines
Overall timeframes can be influenced by numerous factors such as the complexity of the transaction, the efficiency of the planning process, and any legal issues uncovered. Maintaining open communication between all parties involved can help minimise delays. It is important that your solicitor keeps you updated throughout the process. - Cost considerations
Solicitor Fees: Legal costs can vary depending on the complexity of the transaction. Obtain detailed quotes from experienced property development solicitors outlining their charges and any additional disbursements such as Land Registry and search fees to factor into your overall budget.
Stamp Duty Land Tax (SDLT): SDLT is a tax paid by buyers on ‘chargeable consideration’, usually the purchase price of the land. The rates and thresholds for SDLT vary depending on whether the land is classified as residential or non-residential. Certain reliefs and exemptions may be available such as for mixed-use or multiple dwellings.
When buying land intended for development, it is important to pinpoint whether SDLT is payable on the value of the land alone or on the combined value of the land and intended construction (the latter being significantly more). The law surrounding this area is complex, and generally depends on the interconnection between the land purchase and subsequent development.
SDLT liability is triggered on the ‘effective date’ of the transaction. While this is commonly the date of completion, if earlier, it is deemed to be the date on which the contract is ‘substantially performed’ (when the majority of the purchase price is paid, or the buyer has unhindered access to the land). As such, if you aren’t careful, the effective date might have taken place and SDLT due, much earlier than expected.
Unascertained Land Value: When consideration for the land is unascertained at the effective date, an estimate or reasonable valuation may be used to determine the initial SDLT liability, with an obligation to make adjustments once the actual value is known. Unascertained generally refers to consideration, which is determinable, but not determined at the effective date. The same applies when the consideration is uncertain because the value depends on future events, for e.g. if a company acquires development land with a 10% revenue overage for each plot sale that exceeds £300,000 – here the revenue overage is uncertain because it is dependent on a future plot sale exceeding the threshold. Where consideration is dependent on a future contingency, such as obtaining planning permission, SDLT is calculated on the assumption that the contingent event has occurred.
Given the complexity of SDLT calculations, especially in cases of unascertained land value, it is crucial to seek professional advice from an experienced property development solicitor or tax advisor to ensure compliance.
Due Diligence Costs: This includes costs for obtaining property searches, environmental surveys, and any other technical assessments relevant to your project to assess the development potential and any associated risks.
Planning and Development Costs: These are costs related to obtaining planning permission, architectural and design fees, and any initial development planning or feasibility studies.
Land Registry Fees: These are fees payable to the Land Registry for registering the transfer of ownership once the purchase is completed.
What are some of the risks involved in buying land for development?
The project may not be approved: When buying land for development, there is a risk that the local planning authority may not grant the necessary planning permission for the intended development. One way to mitigate this risk is through conditional contracts dependent on planning permission being granted. Option agreements also provide a measure of protection by allowing you to secure the right to purchase the land, contingent on obtaining planning permission.
The costs may be higher than expected: There is always a risk that costs may exceed initial estimates. This can happen due to various factors such as unexpected site conditions, issues revealed through due diligence, or unforeseen construction challenges.
The market may change: Market fluctuations can impact the demand for the developed property. Changes in property prices, economic downturns or unpredicted circumstances such as Covid-19, can impact the profitability of the development.
Restrictive covenants on the land/easements: Restrictive covenants or easements may be discovered during the due diligence process that conflict with your proposed development plans. These can be anything from height restrictions and use limitations to utility easements and access rights for neighbouring land. Your commercial property solicitor will thoroughly review the title deeds to identify any potential limitations and seek to address these.
Rights of way/boundary issues: Boundary disputes can be unveiled by due diligence checks and are generally costly to resolve. There may also be public or private rights of way across the land which impacts your development plans. It may be possible to reach an agreement with neighbouring landowners about the extent of boundaries or negotiate a release from persons benefiting from rights of access.
Environmental issues: Environmental concerns such as contamination, protected habitats, or endangered species on the land revealed through property searches or surveys can impact the viability of your project or incur extra costs to employ mitigation measures where possible.
Location considerations: Factors such as access to roads, utilities, water supply, and proximity to amenities can significantly influence the success of your development. If the site is remote or requires extra expenditure on infrastructure to connect it to mains supplies and road networks, this may impact the project’s financial feasibility.
Summary
Buying land for development can be a lucrative investment, particularly when the market is ripe and there is a demand for your proposed project. If you are not ready to commit, consider entering into an Option Agreement to secure the land for future development. Thorough due diligence before purchasing is key to identify any potential risks, issues, or constraints that may impact the success of your project. Throughout the process, advice from experienced solicitors in land development transactions is essential to navigate the legal complexities. Here at Harper James, our expert commercial property solicitors have a wealth of experience representing both developers and landowners in all types of land acquisitions and developments.
