How to: Sell farm land for development
We are often approached by clients who are considering selling agricultural land for development or have already been approached by a developer or promoter. With the national housing supply shortfall and increasing commercial pressures upon farmers, selling land to a developer can be an attractive alternative to farming the land.
The planning and development process can be a complicated area and all too often landowners find themselves feeling overwhelmed by the planning or sale process or both!
What to consider:
Title: Ask your solicitor to consider the title to the property. This may involve trudging through deeds for the property and registering it for the first time (which can take several months due to a Land Registry backlog). This will ensure there are no nasty surprises or obstacles further down the line such as restrictions on the title or rights for the adjoining land owners that may restrict future development.
Access: Consider access to both the land you are proposing to sell but also think very carefully about the land you are retaining.
Occupational interests: Is the property subject to any occupational interests such as grazing licences or agricultural tenancies that would prohibit or slow down timescales for development.
We frequently come across situations where landowners have not appreciated the difference between agricultural business use and business use meaning that a tenant may be able to request a new lease at the end of the term.
If you are considering granting any new interests in the land, seek advice from your solicitor to ensure that you are taking into account a developer’s requirement for the land to be vacant on completion.
Planning: Depending upon the size of the site and the costs involved, you may choose to obtain planning yourself.
Consider your financial position and whether you are willing to incur the costs of obtaining planning permission and promoting the land yourself in order to maximise the value of the property. Leathes Prior have an all service development team that are able to support you with the planning application and promotion process.
Land agent: If you don’t want to front the planning costs yourself, approach a local land agent to understand if the property has development potential and the methods for disposal.
If you are not obtaining planning yourself, broadly speaking there are two methods for selling land for development:
a. Promotion Agreement – A landowner enters into an agreement with a promoter for a fixed period of time in which the promoter must try to obtain planning permission and market the property for sale on the open market once planning permission has been obtained. The promoter will take a fixed percentage of the sale value. Sometimes the promoter will pay upfront costs such as the landowner’s agent and legal fees for entering into the promotion agreement but these are usually deductible from the net sale proceeds if the property is sold. Entering into a promotion agreement does not guarantee a sale and the promoter may not be successful.
b. Option – A landowner grants the developer a contractually binding option to purchase the property for a fixed period of time or “option period”. The purchase must take place within the option period or as a result of a “trigger event” which is usually the grant of planning permission obtained by the developer. The property is not purchased until the option is exercised by the developer which is usually dictated by the trigger event.
Sometimes the parties will agree the purchase price at the outset of the option agreement but usually the purchase price is related to the market value (and deduction of costs).
The developer will often pay the landowner an upfront fee for entering into the option but this is usually deductible from the net sale proceeds.
Entering into an option agreement does not guarantee a sale. Property can be tied up under an option for a number of years and the landowner cannot sell the property to a third party during the option period. If the developer does not obtain planning permission and pulls out of the option, there is no sale of the property at the end of the option period.
The land agent will agree the ‘heads of terms’ of the deal to ensure that the proposed deal is not balanced in favour of the developer.
Tax: Subject to the proposed advice from the land agent, ask your accountant to consider the tax implications of the proposed heads of terms. Make sure that your agent, solicitor and tax adviser are all joined up to make sure the deal is structured in the most tax efficient way for the business. This should also include any inheritance and succession planning.
The opportunity for selling farmland for development if approached badly or misinformed can be disastrous but if tackled correctly can create once in a lifetime opportunities for farming businesses and families. There is no one size fits all and each situation needs to be considered individually depending upon the circumstances and intentions of the parties.
For more information of selling farmland for development or any other property matters, please contact Lucy Chambers in our Agriculture team on 01603 281183 or email lchambers@leathesprior.co.uk.
Note: the content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in any specific circumstance.