21 Dec 2023

Focus on: Land development

Our Partner Andrew Perrott, heads up the Rural Business and Landed Estates team. We speak to Andrew about his work with clients looking to development their land, and what challenges might be on the horizon.

What does land development involve?
‘Land development’, when used in this context, usually involves farmers or owners of rural estates who are looking to develop land for another purpose that falls outside of farming.

Traditionally, the majority of development projects would involve new housing, but over time we are seeing land being employed for a plethora of uses such as medical parks, more specialist farming related activities and even golf-course expansions!

Solar sites have also become highly sought after again. These surged in popularity well before COVID as people rushed to secure them amidst favourable subsidies. And, unsurprisingly, when the subsidies dipped the demand also fell away. However, in the last 12 months, as energy costs have risen, and the paybacks have become more reliable, solar sites are very much back on the market.

Because the options for land development have broadened, the considerations have become greater and the process of accurately valuing that land has become more complex and, at times, increasingly challenging. It is important to work with a team that understands these issues and has a good sense of what housing will likely be worth, as well as how alternative uses need to be considered as part of a valuation.

Option vs promotion agreements
As the economic landscape changes, so do the routes that clients choose to take in their land development process. There is no right or wrong type of land development agreement, instead choices must be made that consider an organisation’s unique circumstances and financial set up.

Option agreements
Traditionally, land development was completed via option agreements. This is a contract often entered into between the house builder and the landowner, where the house builder secures planning permission to put houses up on land–a process which could take several years.

Once that permission is granted, a value is agreed for the land, and then the housebuilder buys it at an agreed discount on that price, due to their efforts to secure the planning permission.

Promotion agreements
In recent years we have seen a shift towards promotion agreements. In these scenarios, a third party enters into the negotiations to obtain the planning permission and, at the end of that process, the land will go to the open market for sale.

This typically results in better price outcomes for the landowners. In option agreements clients may find themselves negotiating over the value of the land with a large housebuilder who has huge amounts of resource and is able to knock down the price. While in the open market, clients can benefit from operating in a more competitive environment for the land, particularly because it already has planning permission.

That said, if clients are entering into a promotion agreement, the taxation does become more complicated and there are more moving parts to consider. So, although there is typically a better return for the landowner, the tax, particularly VAT, is more complicated. For example, there are considerable fees paid to the promoter that are subject to VAT and, if finances are not properly structured, this cost can’t be claimed back. It’s therefore crucial that clients seek specialist VAT advice. Our specialist VAT team can help with this.

Overall, whether clients choose an option or promotion agreement, will vary on a case-by-case basis and not just relate to the financial returns, in some cases, it is important for the landowner to retain control of the process. Hybrid agreements–a blend of these agreements–are also becoming a more popular way to spread the risk.

Collaboration agreements
In the past, collaboration agreements were also popular. These deals entail groups of landowners coming together to offer up a larger area for development.

But far fewer of these are now taking place, primarily due to the complex tax issues associated with a multi-party agreement, but also because of the challenges involved with landowners agreeing on collective objectives.

This is an incredibly bespoke area of land development, so we would recommend that any clients who may be considering a collaboration agreement seek specialist advice.

Agreements are taking longer
Over the last two years we have recognised a trend of agreements taking longer to come to fruition. Traditionally, option agreements were made on a 20-year basis. This, in part, drove the shift towards promotion agreements, which in theory took around five to seven years–on the basis that promoters are looking to get their funds out a lot quicker than a house builder might be. But even those five-to-seven-year agreements are now realistically more likely to be ten-year agreements. Assuming certain criteria are met, there are usually opportunities to extend agreements.

It’s crucial that clients understand how long their land is going to be tied up for under one of these agreements–there are often numerous restrictions around the transference of land, for example. And certainly, as the agreements get longer, the interaction with inheritance tax (IHT) becomes more relevant. When considering IHT planning, for instance, clients ideally want to be able to pass land on without having to go back to the option holder or promoter for permission.

Additionally, as agreements lengthen, it becomes increasingly important that the agreement is set up correctly from day one, or is being reviewed regularly, to ensure that the structure is such that it allows a client to pass that land on. Our specialist IHT team can help with this.

Why are agreements becoming longer?
How long agreements take is often subject to a combination of factors including the economy, how many new houses are being sold, and what government policies are in place.

The planning process is also becoming a lot slower, partly because securing planning permission on a building site for houses is a two-stage process–which many people do not realise. Whilst a client might have already secured planning permission, it is then subject to an agreement of ‘reserved matters’ with the Council. And getting these approved is often where bottlenecks form.

As a result….
The unknown length of this part of the process often results in variability and uncertainty as to when the tax will become due. We’ve had clients, for example, waiting for confirmation in the period around 5 April who don’t know if it will fall in this tax year or next. This issue is of course compounded by the uncertainty around what might happen with tax rates going forward.

It's crucial, therefore, that clients understand how an agreement might impact their tax payment profile, and what monies they will receive and when. For instance, as agreements take longer, we are seeing payment terms being renegotiated to allow payment over a longer period of time. Where in the past agreements might have been paid in two tranches, now we see agreements that spread the price over five or six years. As a result, clients can often be caught out by details such as tax being due on the timing of the first payment, but for the overall amount.

Which clients should get in touch with Monahans?
The clients that we feel may benefit the most from speaking to us are those who signed up for option or promotion agreements five or ten years ago–often from elder generations. Land is still in these people’s names and as they are getting older, and agreements are taking longer, these clients need to be talking to us now about options for restructuring. Solidifying their financial plan is crucial to ensuring that their loved ones or descendants are not left with a significant IHT bill, and potentially no cash to pay it.

If you need support with your rural business or landed estate, get in touch with Andrew today, who would be more than happy to help.

Andrew Perrott