The completion of a new housing development marks the culmination of a complex process in which a host of people with different roles will have been involved. Architects, engineers, building contractors, bankers, lawyers, States officials, all will have played their distinctive and necessary roles. However, virtually all developments start with a deal struck between two parties, the landowner and the developer. Every deal is different, depending on the property and parties concerned, but there are a number of principal ways in which the contractual arrangements are structured.
First, the transaction may proceed straight to completion. There may be an existing planning permission in place for the site or the purchaser may otherwise be confident of being able to develop as it wishes. This, of course, is the simplest form of transaction and the one which is likely to be most favoured by vendors, with the prospect of realising the value of the site in a short timescale following the purchaser’s usual due diligence process.
Secondly, the parties may enter into an unconditional agreement but with a deferred completion date. This may be appropriate if the vendor cannot provide immediate vacant possession, for example if at the time the sale is agreed the property comprises a hotel which is to remain open for a final season.
The third possibility is a conditional purchase agreement. Typically in such a case the parties’ agreement to complete the sale and purchase of the property will be subject to planning permission being obtained by the purchaser within a stipulated timescale. A number of issues will arise for consideration and inclusion as appropriate in the agreement, including:
Fourthly, the transaction can be structured by the use of an option agreement. Option agreements are in many ways similar to conditional purchase agreements but the crucial difference is that parties are only bound to complete if the purchaser exercises its option in a stipulated timescale. Rather than paying a deposit, the purchaser pays an option fee as the price for this flexibility. The option fee is offset against the price if transaction completes but otherwise is retained by the vendor.
As well as the basic contractual shape of the transaction, there are other factors that will influence the form and content of the transaction documents. For example, the deal may be structured as the sale and purchase of a holding company rather than of the underlying freehold property. There are also various possibilities in relation to the payment arrangements – instead of the ‘vanilla’ option of a fixed price payable at completion, there may be, for example, a base price plus additional amounts (known as ‘overage’) dependent on factors such as the amount of accommodation permitted by the planning permission or the sale value of the completed units.
Whatever the terms of the transaction, the important thing is for the transaction documentation to be clear and workable, so that the vendor and the purchaser each know what they need to do in order to bring the deal to fruition and enable the construction of the development to begin.