Selling Land to Developers
Read time: 6 minsSelling land to a property developer can present a significant opportunity for landowners, but the structure of the agreement is critical to achieving the best outcome. Developers typically seek arrangements that minimise their risk while securing the ability to obtain planning permission before committing to a purchase.
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There are several ways that developers may wish to purchase land from landowners. It is worth remembering that developers will likely have purchased land previously and have significantly more experience at purchasing land than any seller.
A developer is likely to be friendly and charming during the process of purchasing land, however, it is worth sellers remembering that they are working for businesses and are acting in their employer’s (or their own if they are individuals) best interests and are unlikely to be concerned with what is best for an individual seller.
A developer will not wish to purchase land unless they have a guarantee they will be able to develop the same and therefore, make money on the same. As such, it is rare for a developer to buy land outright without planning permission being granted in relation to the land in the first place, and the developer will not want to meet the cost of planning permission unless they have some guarantee of purchasing the land once that planning permission has been granted. The following are examples of the types of agreement that might be suggested by a developer and the pros and cons of each.
It is always worth remembering that applications for planning permission can take some time and any of the following options will ‘tie-up’ the land and limit what the landowner can do in relation to the same, meaning that the seller will be stuck and will be unlikely to be able to sell the property until the expiry of the below agreements.
1. Conditional agreement
Arguably, this is the most beneficial arrangement for a prospective seller. The contract would state that on the granting of the planning permission the seller is obliged to purchase the property. This allows the seller maximum protection in relation to the sale and a landowner could take the developer to court for specific performance of the contract.
The formation of the contract is important, usually there would be a clause to state that any planning permission will need to be satisfactory for the buyer and such clauses should be carefully considered so that there is not an ‘out’ for the developer in any circumstance.
It is also important that time limits are placed on a conditional agreement so that each party is not bound by the same indefinitely.
2. Option agreement
An option agreement is more favourable for a developer. Under these agreements the developer will usually apply for planning permission. Once that planning permission is granted, the developer will have a choice whether or not they proceed with the purchase of the property. This can mean that a seller is unable to deal with their land as they see fit or sell the same for the period of the option agreement only for the property not to be purchased at the end.
Owing to this, sellers should receive something in return for the grant of the option. This may be money or some other benefit.
It is important for sellers to remember that an option is only the possibility of a future sale and as such any purchase price recorded in the option agreement is only a possible purchase price and might never be paid, as such sellers should not be swayed to accept an agreement only because of a generous purchase price.
3. Promotion agreements
These work differently to the above-mentioned agreements and allow a developer the opportunity to apply for planning permission and then sell the land on to another party who will actually develop the property. When developers advocate for these agreements, they are likely to discuss with the seller that this puts both the seller’s, and the developer’s interests on the same level as they will both want to achieve the greatest price for the land. While this may be helpful it is also worth remembering that these agreements come with large benefits for developers who face far less risk in selling the land on, rather than developing the land themselves.
Sometimes promotion agreements will also contain provisions that allow the developer an option to purchase the property should a buyer not be found.
Frequently Asked Questions
What is the best type of agreement when selling land to a developer?
A conditional agreement is often considered the most favourable option for landowners because it commits the developer to purchase the land once specified planning conditions have been met, providing greater certainty that the sale will proceed.
What is an option agreement?
An option agreement gives a developer the right, but not the obligation, to purchase your land within a specified period. If planning permission is secured, the developer can decide whether to proceed with the purchase.
Should I receive payment for granting an option agreement?
Yes. Because an option agreement restricts your ability to sell or develop the land elsewhere, landowners will often negotiate an option fee or other consideration in return.
How long can a developer tie up my land?
This depends on the terms of the agreement. Some agreements can last several years while planning applications are pursued. It is important to negotiate clear deadlines and termination provisions.
What is a promotion agreement?
A promotion agreement allows a developer or promoter to secure planning permission and then market the land to third-party developers. The sale proceeds are typically shared according to the terms of the agreement.
Examples
Example A
Conditional agreement
Mr Smith owns a five-acre parcel of land on the edge of a growing village. A developer believes the site has potential for 50 new homes but requires planning permission before proceeding. The parties enter into a conditional agreement stating that if planning permission for at least 50 homes is granted within three years, the developer must purchase the land for £2 million. Planning permission is obtained after 18 months, and the developer is contractually obliged to complete the purchase.
Example B
Promotion agreement
A farming family owns 20 acres of land suitable for residential development. They enter into a promotion agreement with a specialist promoter who funds the planning application process. Planning permission is granted for 150 homes, and the site is marketed to multiple developers through a competitive bidding process. The land sells for £8 million, achieving a higher price than might have been secured through negotiations with a single developer. The promoter receives an agreed percentage of the sale proceeds.
Contact Kew Law's Commercial Property Team
With any of the above agreements, it is imperative that a solicitor is instructed in order to assist with any of these matters.
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0800 987 8156
Nicole Gibbs
Senior Associate (Solicitor)
Yasmin Zubair
Solicitor