24th April 2020
No-one underestimates the devastating impact of COVID-19. But once the immediate crisis has passed and we return to some kind of normality, the need for housing will remain strong. In fact, the challenges caused by poor quality and overcrowded housing have been painfully highlighted in the current crisis and it will be more important than ever to develop a robust land supply.
The response of the land-side of the development industry is still evolving: some developers have stopped land purchases altogether and most will have to deal with market uncertainty and cash flow constraints. However, for some developers, the current period brings an opportunity to secure the land supply they had been looking for but had not been able to access.
Options are a robust way to purchase land in period of uncertainty, allowing fair balances to be struck and for parties to defer some decisions until adequate information is available. Inevitably, with such remarkable changes in the market, options must adapt and respond to the business needs of developers whilst giving the landowner confidence that they will sell their land for a fair price within an acceptable timeframe.
So, when it comes to the development of land, what challenges does the COVID-19 outbreak pose, and how do parties need to position themselves to respond swiftly to improving conditions?
Cash is king
Cash flows are uncertain in the short and medium term. Expertly-drafted options strike the balance between securing the site and ensuring site investigation costs and planning costs are incurred in step with the growing likelihood of a successful planning application.
Staggered option payments (perhaps with a lower initial option payments then further payments tied to key investigations and planning steps) enable cash to be released as risk reduces but do require careful thought and planning. Identifying key steps and planning payments around unexpected outcomes is essential.
In addition, more nuanced and possibly wider deductions from the purchase price to take account of enhanced due diligence (see below) and abnormal costs (e.g. additional ecological management) can be included or at least taken into account in market valuations where this is negotiated from the outset.
It may be impossible to do all of the pre-exchange due diligence that might otherwise have happened: it’s not easy to get contractors/consultants to site and some investigation work just can’t proceed with social distancing measures in place. Option agreements can incorporate processes to allow sequencing of due diligence and release of option fees in tandem, ensuring speculative spend is minimised.
Site management work, ecological control and archaeological investigations which might have happened this spring and summer may not be possible until next year. Provided they deliver certainty longer term, landowners may be prepared to allow option extensions for a greater range of reasons (e.g. unavoidable delays in lodging planning applications whilst ecology and archaeology is dealt with).
Reduced access to the countryside will cut footfall around many sites and will increase the chances of ecological gain: for instance increased badger numbers and mobility (as we saw with the foot-and-mouth epidemic in 2001). Developers should allow for early ecological advice about the likely issues this summer and autumn. Options which allow extensions to deal with such issues as monitoring and dealing with ecological gain and the costs of additional ecological measures next year should give confidence to both developers and landowners that the resulting planning permission will be implementable and will result in a land sale.
Closure of recycling centres has already resulted in fly-tipping (sometimes of hazardous waste) becoming an increasing threat to landowners and developers alike. Early access arrangements to enable sites to be better secured and pre-planning how to deal with environmental risks should now be considered within all option agreements.
Options can also accommodate uncertainties around utilities and precise drainage strategies as utilities companies and the Environment Agency may be suffering staff shortages and backlogs by incorporating extensions for such arrangements and price adjustments.
The planning system
In the immediate short-term the planning system has held up remarkably well, with legislation passing swiftly to enable planning committee meetings to take place remotely and Government guidance encouraging delegation of decision-making to officers.
However, for sites which require an appeal by hearing or inquiry (up to 10% of all permissions granted) and for those which are not allocated, things are not so easy. The planning appeal system is playing catch-up and is currently piloting a small number of appeals by hearing or inquiry remotely. Allocation consultations are likely to be put on hold for some time owing to a lack of frontline officers and questions as to how to ensure full public consultation.
Developers may face the possibility of planning permissions expiring before implementation is possible. Some of these issues can be dealt with by incorporating extension provisions for a wider variety of events (such as securing technical approvals) and conservative long-stop dates. Carefully adapted early access rights also allow the preservation of planning permissions by minor implementation works but great care has to be taken to ensure landowners are protected from liability under any s106 agreements and Community Infrastructure Levy (CIL) or similar.
Market uncertainty and valuation issues
With a fewer land sales, more distressed sites and disrupted house sales, gathering data for valuations and comparables will be tricky for some time. Some landowners may choose to sit tight and see what happens, reducing the pool of information further. In the initial drafting of option agreements, some of these challenges can be overcome by re-assessing the usual geographical radius and age of acceptable comparables and also geographical location of expert valuers.
Standard terms in options can also be altered to allow developers to choose their moment to buy and to protect landowners (for instance, by allying minimum prices as a safety net to landowners with the ability by the developer to serve a valuation notice at any time or even more than one valuation notice during the option term).
Overage agreements may well allow landowners to proceed in uncertain conditions, confident that under-valuations can be corrected once sales data is available. However, overage arrangements are complex and legal advice is advisable both at all stages. As a registerable interest, parties should also make sure confidential overage arrangements are kept off the Land Registry title to the property.
With greater uncertainty comes greater margin for disputes and the need to control the cost of disagreements. Traditional option disputes clauses often direct all disputes to an expert surveyor but this may no longer be appropriate. An alternative approach may be to send each dispute to the appropriate expert:
Given the Government’s focus on public health and economic stability, there has been limited focus on new homes for now. However, some tax measures will assist developers to manage cash flow – for instance, VAT deferral, which should be incorporated in options to allow developers to make use of them whilst they are available.
With staggered option payments and possibly extension fees, developers should also take care to ensure that a careful note is kept of all sums paid under an option so that SDLT returns are filed at the appropriate time, deferrals are claimed (particularly in the case of overages) and penalties are avoided.
The reality is COVID-19 will continue to disrupt lives for some time to come. The back-end clauses in options covering those pedestrian matters which people care little about become more important. Notice clauses should reflect the new reality of shielded people and possible longer-term illness, for instance accommodating email notices, notices to be served on representatives and other arrangements to be made where parties have to leave letters unopened for a period.
Options should also refer to any arrangements which have been made involving powers of attorney either by the developer or landowner.
Flexibility on the part of landowners and developers can allow developers to continue to pursue sites in the shorter term despite working restrictions, cash flow considerations and market uncertainty. Options are perfectly designed to enable this but require skilled adaption and forethought as we navigate new waters.
Please note: Nothing in this article constitutes legal advice and we are not liable for any reliance on the information provided. This is a rapidly changing subject, and whilst correct at the time of writing, circumstances may have changed since publication. Please refer to Gov.uk for up-to-date advice on the Government’s response to this issue.
To find out more about anything covered in this article, please contact Rebecca Dixon or another member of Thrings’ Development team.