Selling land – Have you considered everything?

10th Aug 2020

Author: Butcher & Barlow

If you are selling a piece of land, there is more to consider than just asking price. Partner James Hodgson explains what other factors should be taken in to account.

In my work at Butcher and Barlow I can often act for people with land to sell. Many imagine it’s a straight-forward transaction. You set a price and wait for the offers. Whilst this can be the case there are things you should consider other than just the asking price of the land itself. You should also think about its potential use and if that could provide you with an additional income long after the ink has dried on the initial sale contract.

The UK needs to build around 250,000 new homes each year to meet the current housing demand. Sellers of land should consider whether there is potential for the land they’re selling to be re-developed in the future. Where there is development potential, sellers ought to consider protecting their position by imposing an Overage Provision. If you don’t, you could miss out on a higher sale price if the value of the land subsequently increases.

This overage describes a sum of money, a seller may be entitled to receive, in addition to the original sale price. Within the land sale contract, it is possible for a seller to establish a right to a future payment if a relevant trigger event occurs within a defined period of time after completion.

A simple version of an Overage Provision might state that a further fixed sum would be payable for each additional dwelling built on the land. There are, however, numerous different forms of wording – some of which rely on a more complex valuation mechanism to calculate the additional payment. For example, a seller and a buyer might agree that if the land is developed within 25 years of completion the buyer will pay the seller 50% of the value increase as a result of the development.

There are a number of different points for the parties to agree, including the time period, what type(s) of development will trigger a payment, whether the payment is a fixed amount or a variable sum and how exactly the increase in value is to be calculated. The legal drafting surrounding this type of provision is often complex and will increase the costs of the transaction for both parties – but could pay dividends in the future.

Sellers need adequate protection for a number of reasons. It is important to remember that a seller has no control over whether or not any development takes place, therefore there is no guarantee of any further payment.

It’s also important to ensure that if the land is sold on again during the payment period the new owner should also be bound to make payments to you should they develop the land. Just because the landowner may not necessarily have the knowledge or contacts to develop the land they own, they should not be effectively be out of pocked should someone else acquire it for cheaper and significantly increase the price in the future.

Sellers will also need to consider what mechanisms are available to ensure that they receive notice of any development to ensure they are in a position to claim the further payment.

As you can see there’s more to think of than merely the price of the land itself.

This article is intended as a general overview of factors to consider. If you would like advice specific to your circumstances, James can be contacted on 0161 764 4062 or jhodgson@butcher-barlow.co.uk