Sometimes people think that they might want to buy land and buildings but the time isn’t right for them. Perhaps a landowner isn’t ready to sell or a buyer isn’t ready to buy for some reason. This does not mean that they can’t plan for the future and enter into agreements over property that allow them to make the necessary arrangements.
Landlords can use pre-emption agreements to give their tenants the right to buy the property in their lease. Landowners can give developers a right to buy land to build houses on in the future.
If this could benefit you, then your commercial property solicitor can help you structure a transaction to ensure that you do not miss out on a deal.
- What is a pre-emption agreement?
- What is the difference between an option to purchase and a pre-emption agreement?
- Types of pre-emption agreement
- Pros and cons of pre-emption agreements
- What should a pre-emption include?
- Breaches and enforcement of pre-emption agreements
- Alternatives to pre-emption agreements
- Other considerations
What is a pre-emption agreement?
There are two modes of structuring a pre-emption agreement and the type that will work best for you depends on what the parties’ intentions are.
A conventional, or ‘call’ pre-emption agreement is a contractual agreement giving a specific person or organisation the right to buy land or buildings before any other third party buyer for a fixed period of time. If the pre-emption is triggered then the Buyer does not have to buy, but the Seller must offer it to them before selling to anyone else. This would be good where the buyer isn’t 100% certain that they want to buy but would like to be offered the choice when the Seller decides to sell.
The other form of pre-emption agreement is a ‘put’ pre-emption agreement and this is where the difference between a pre-emption agreement and an option agreement gets more difficult to establish. It is the same as a ‘call’ option except that the seller can oblige the buyer to buy the property. This would be a good option, for example, where you have a Seller who wants to sell but isn’t ready yet (maybe they need to do some work to the property or take steps to remove a tenant) and a Buyer who is committed to buy when the Seller is ready. This type of agreement is also quite similar to a conditional contract and it is easy to get all of these forms of agreement confused; this is why it is best to speak with your commercial property solicitor so that you can work out what works best for your transaction.
A pre-emption agreement should be protected at the Land Registry with a restriction. This alerts anyone looking at the title that this right exists and also prevents the land from being sold without the consent of the person with the benefit of the pre-emption.
What is the difference between an option to purchase and a pre-emption agreement?
On the face of it, a pre-emption agreement and an option agreement seem very similar. However, one of the major differences between the two are what triggers them.
In an option agreement completion will be triggered by its conditions being fulfilled and a buyer issuing an option notice. In a pre-emption agreement the trigger will be the owner wanting to sell the property and giving notice to the beneficiary of the pre-emption. Therefore, the onus to trigger sale is with different parties depending on the type of agreement. With an option agreement it is with the buyer whereas with a pre-emption agreement it is with the seller.
Another difference is that an option agreement will usually bind the land. This means that if the landowner sells the land, the option will remain in place over the land until either it is exercised or it expires. Whereas a pre-emption agreement is able to be a personal right (e.g. over unregistered land), meaning that once it is sold and the right to buy hasn’t been exercised, the agreement is no longer valid.
By law, an option agreement must be in writing, but a pre-emption agreement does not have to be. None the less it would still be very wise to put it in writing to try and prevent disputes later.
The two types of agreement are also dealt with differently for tax purposes and anyone proposing to enter into one should take the proper advice from a tax specialist.
Types of pre-emption agreement
There are three types of pre-emption agreement:
- First Refusal – this type enables the Buyer to buy the land either for market value or for a price set by the landowner. If the buyer does not accept the offer then the landowner can sell it to someone else.
- Last Refusal – this type of pre-emption gives the right for the buyer to match a genuine offer made by a third party to the landowner to buy the property. The landowner must then accept this matched offer; and
- An agreement to buy the property at a price to be determined by a third party.
Pros and cons of pre-emption agreements
Ultimately the features of a pre-emption agreement may be a pro for some and a con for others!
- They give certainty to prospective buyers as it is a guarantee that they will be offered the property first should the landowner wish to sell.
- They can save landowners the expense and uncertainty of going to market with the property.
- There is no obligation for the Seller to sell and therefore no guarantee that the agreement will ever be used during its lifetime.
- Pre-emption agreements should be protected at the Land Registry by way of a restriction. This will alert other prospective buyers to its existence and it might put other genuine buyers off making an offer on it.
What should a pre-emption include?
- Time period – As with most land agreements, the parties will not want the rights to last forever. It is important to give certainty to the parties and so they must agree how long the pre-emption period will last. There are no rules giving a maximum amount of time, so this is a point up for negotiation.
The parties will also need to work out the timescales that will apply in the event the right is exercised. The Seller will need to serve an offer notice and there will need to be an agreed timeline for the actions that take place from that point onwards (for accepting or declining the offer and then, if relevant, for the actual sale process).
- Definition of property for sale – a clear definition of property will help reduce the likelihood of a dispute. A clear description of the property offered under the pre-emption agreement should be included with reference to Land Registry titles as appropriate and a plan.
- Trigger – thought should be given to what will trigger the landowner’s obligation to offer to sell the property to the pre-emption beneficiary. The definition of ‘disposal’ is important: what will the landowner be allowed to do? Can the landowner grant leases and/or licenses or will there be a blanket ban on all disposals? Whatever is decided the definitions should be drafted carefully to prevent the landowner from structuring a deal that circumvents the purpose of the pre-emption agreement.
What happens if the landowner wants to sell part? What happens if the landowner wants to give the property to someone as a gift? All of this should be considered in the drafting.
- Valuation – the parties will need to fix either the purchase price or fix the method of calculating it. Will it be a market valuation? What will the assumptions and disregards be in calculating it? Will the parties get a surveyor involved at the outset or try to agree it between themselves in the first instance?
- Making the offer – there may be an agreed form of offer notice attached to the agreement in an appendix or the agreement may state the information that must be contained in the offer notice and how it must be served on the prospective buyer.
- Accepting the offer – the prospective buyer will have a set period of time stated in the agreement during which to accept the offer. They will need to have a reasonable length of time to consider and accept, but the landowner will want this to be as short as possible so that they can get on with the sale if the pre-emption holder does not decide to buy.
- Declining the offer – if the landowner’s offer is rejected, what happens to the pre-emption right? Will that bring the pre-emption agreement to an end? Or will the pre-emption continue for the remainder of the pre-emption period if the landowners attempt to sell the land fails?
- Dispute resolution – the pre-emption agreement should provide for how disputes should be dealt with and will usually have a process that the parties have to follow. Expert determination is the most often used dispute resolution mechanism.
Breaches and enforcement of pre-emption agreements
In the event of a breach of the pre-emption agreement, the parties should turn to the dispute resolution mechanism in the agreement. If the clause provides for expert determination then the expert should consider the evidence and make a decision on what is to happen.
Ultimately a breach of the pre-emption agreement is a breach of contract and the party who has suffered the breach will be able to pursue the usual contractual remedies such obtaining an order for specific performance and seeking damages against the party in breach.
Alternatives to pre-emption agreements
The main alternative to a pre-emption agreement is an option agreement and in choosing which document to use, you will have to work out what you hope to achieve from the deal and when.
Are you the seller or the buyer? What level of commitment do you want to give to the property? Who do you want to be in ultimate control of the sale and when it happens?
An option agreement might arguably give the parties more certainty but in the end no one is actually committed to buy until a buyer serves an option notice and an option period can lapse. If you are the buyer then you may prefer an option agreement as a certain degree of the power rests with you: you will be the one who exercises the option notice when a trigger event happens.
Landowners might prefer a pre-emption agreement as they will be the ones calling the shots in relation to timing. The landowner is the one who decides they want to sell and it is they who serve the offer notice. They are not compelled to do anything until they decide it is time to sell.
The document you end up using for your transaction will depend entirely upon what you hope to achieve.
Your commercial property solicitor will consider whether the grant of a pre-emption agreement will be subject to stamp duty land tax. They will help you work out whether a tax return needs to be filled and whether there is any tax to pay.
Your solicitor will also help you with the registration of the pre-emption agreement at the Land Registry.
As a landowner, your solicitor can help you plan out your timings should you wish to sell and can also help you serve the necessary notices.
There are several options available for landowners and buyers who want the option or right to enter into transactions in the future.
Where there are two willing parties, a suitable structure can be found to ensure that the right person buys the right property at the right time. Talk to your commercial property solicitor early so that negotiations can be shaped properly.
Whether you are a landlord who is unsure whether they want to continue letting their building or an undecided seller who has been approached by a developer; a pre-emption agreement can help you plan for the future with an interested party.