There are several ways to approach development agreements and Sworders are well placed to help you decide which one is appropriate for your circumstances. An overview of some methods is given below.
Consortium agreements (which are increasingly referred to as collaboration agreements) are a mechanism by which a group of landowners can eliminate potential conflicts between each other when it comes to masterplanning a development scheme across multiple ownerships.
There are various means of equalising proceeds but if all the land is expected to be developed, this is often pro rata to the planning consent area and, on occasion, particularly for larger schemes where housing numbers are uncertain, sometimes it is appropriate to equalise part of the proceeds to follow the planning consent area and part of the proceeds to follow the area included in the consortium agreement to start with. That way, there is a ‘consolation prize’, with some proceeds payable to landowners whose land may not be developed, in recognition of the original agreement and the fact that they were willing to join in, helped secure a planning consent.
As mentioned, the description ‘collaboration agreement’ is increasingly used interchangeably with ‘consortium agreement’ and therefore, in many people’s minds, they are arguably the same thing. However, it is possible for parties to collaborate without a formal equalisation agreement and such a collaboration agreement can achieve some form of equalisation of value for an agreed masterplanning approach.
These agreements can work well where there is confidence as to the boundaries of the planning consent area (for example, following an allocation or draft allocation in a Local Plan and regarding timing, phasing and land constraints), that would create additional complications for equalisation or preclude trust pooling (please see taxation).
A conditional contract can be a useful means of reaching an agreement with a developer, where values are unlikely to change significantly in the period of conditionality and where it is necessary to give the developer control over the final form of planning consent. Developers like them because in most cases the developers have control over the element of conditionality and, therefore, it is not unusual for developers to produce draft conditional contracts that are in effect no better than option agreements. They can however be useful for landowners when trying to speed up a process over a short period, and at a price that has been agreed, and a good example might be to exchange a conditional contract, conditional only upon expiry of a third party challenge period (with any third party challenge outside the control of both a developer and a landowner) and to facilitate exchange and completion in quick succession thereafter.
Option Agreements are house builders’ favourite type of agreement and therefore remain widely used in the industry despite it being extremely difficult (we would argue virtually impossible) to fully protect a landowner’s position under an option.
There is a raft of potential misalignment of interests under an option, the most obvious one being that if a builder is paying a landowner a fixed percentage of Market Value, e.g. 85%, the incentive is for the builder to minimise Market Value once it reaches any minimum sum threshold.
Sworders has been at the forefront of the use of promotion agreements and although there are no statistics available, it is believed they probably now comprise more than 10% of development agreements nationally (with options being by far the majority). From Sworders’ perspective, however, over the last twenty years promotion agreements have comprised circa 90% of our development agreements. Through a promotion agreement it is possible to achieve a close alignment of interests between both the promoter and the landowner.
Hybrid agreements are increasingly used by house builders and their agents as a means of seeking to persuade landowners that they get the ‘best of both worlds’. The arguments put forward are that they get the benefit of a major house builder (ensuring confidence in delivery), whilst also maintaining an alignment of interests through the hybrid nature of the documents. The theory is that the hybrid agreement is based on a promotion agreement with the house builder then having a right to develop out some of the land.
As a proportion of total agreements put in place by Sworders in the last twenty years, hybrid agreements represent fewer than 10% (but still more than option agreements). There are many pitfalls with hybrid agreements but the main one is that, typically, house builders want to be able to acquire a bigger proportion of land than they pay for initially and this immediately creates misaligned interests and can give a house builder an incentive to minimise value rather than maximise it.
The popularity of joint ventures has waned during periods where there is a substantial difference between the rates of capital gains tax and rates of income tax but they still provide a potential opportunity for landowners to become involved in a development and, typically, this can be through a limited liability partnership or a Special Purpose Vehicle limited company. There can be the opportunity for a landowner to achieve capital reliefs, first in transferring the land to a joint venture company with the developer putting cash into the company to acquire their share of the land at a sufficient level to cover the landowner’s capital gains tax, and provide any up front monies required. In some cases, landowners put in the land, the house builder funds the construction of houses and the receipts are divided in a pre-agreed manner. Although representing a very small percentage as a whole of developer agreements, Sworders has advised on a significant number over the years.
There is a raft of potential pitfalls when it comes to taxation of strategic land and Sworders work closely with clients and their accountants and solicitors to achieve any legitimate tax savings that may be available.
For larger scale developments with multiple ownerships it is very important to take specialist tax advice when it comes to equalising proceeds of sale between landownership, as this can have unintended taxation consequences, particularly for those who thought they were entitled to a capital tax relief (such as Entrepreneurs’ Relief or Roll Over Relief) but find such only applies to a proportion of proceeds generated from their own land and not those proceeds received from equalisation from others’ land. There are several mechanisms for equalising in a tax efficient manner and these include Cross Restrictive Covenants, Cross Options and Trust Pooling.
Conflicts of Interest
Sworders do not act for house builders in any form of development agreements and do not accept introduction fees (other than passing them on to their clients if the price cannot be adjusted for the client’s benefit). Often acting on entirely ‘no win, no fee’ terms in the early stages of land promotion, Sworders has successfully promoted, either themselves or through third party promoters, sites for over a hundred landowners in the last twenty five years and have achieved allocations for 16,500 dwellings and emerging draft allocations for 7,500 dwellings. More recently Sworders has undertaken a number of five year supply shortfall applications, bringing forward sites that were, in some cases, not even being considered under the Local Plan process.
In many districts Sworders act for more than one landowner with the inevitable risk of potential conflict arising should, ultimately, such sites compete for the same housing numbers through a Local Plan process. Sworders are always entirely up-front about the risks of conflict and always encourage landowners to appoint someone else should they consider any conflict to have arisen. However, for landowners with limited resources in districts where we act for multiple landowners, we can provide a cost effective monitoring service as we spread our time based costs between the multiple landowners when it comes to attending Local Plan and other relevant meetings and keeping abreast of the evolving Plan process.