Acquisition of development sites
Once a prospective project is sourced the developer will need to go through a process of its acquisition.
Identifying the key issues
When investigating the development potential of a project there will always be one or two ‘ Key issues’ that need to be understood or resolved prior to any further investigation and work is incurred on the project. These might relate to just about anything. Commonly ‘Is there the realistic likelihood of achieving the desired planning permission?’. Or ‘What is the extra over cost of the retaining walls likely to be?’. Less common, ‘Can we indemnify the potential enforcement of the restrictive covenant?’. Or ‘What on earth is the neighbour doing with twenty old cars rotting in his back yard?.
Key issues need to be addressed before any others and this means that the due diligence process is not a methodical ticking of boxes. Some issues will demand to be addressed prior to others. The Developer needs to have the ability to recognise these key issues and to prioritise them. There is no point in commissioning a land survey and architects plans for project that is for example, subject to a building scheme restrictive covenant which is likely to defeat all potential for development. You may not wish to instruct a lawyer until the cost of the retaining walls on a sloping site is quantified or the results of a pre application meeting with planners is known.
All development projects will have key issues. The developer must be sure to identify them and be prepared to walk away from a deal if there is no solution to them.
Controlling the acquisition
Whomever is handling the acquisition it is important to be in control of the process and its timing. Control may be asserted by the developer preparing the agenda for a meeting, or drafting sketch plans. It may mean that the developer sets out the timescale. He may offer the vendor to have his lawyer draft the legal Agreement. He sets out any requirement that the vendor will need to action. For example, seeking a mortgagee’s consent to a sale of part may take time and hold up the transaction if not identified at the outset and undertaken expeditiously. Matters such as this should be addressed when terms are agreed and timescales discussed not left to the week before exchange of the purchase contract. The developer should instigate a Heads of terms agreed.
Due diligence
Due diligence is the process of investigation and obtaining answers to all the questions that arise for an acquisition of a site.
It is certainly good practice to prepare a Pre contract report that requires a list of questions to be answered such that all matters are documented and reviewed prior to the acquisition taking place. When I worked for a national house builder the review process included a Pre contract meeting where the land buyer was sat the end of a table of heads of departments, all experts in their own fields and ready to interrogate every aspect of the project. It was almost inevitable that one of them would be disappointed. The sales director would raise eyebrows on the projected sales prices, the engineer would be concerned about the extra over costs of foundations or drainage, the lawyer might grumble about a risky title. The bottom line was, as they all knew, that every project has its risks. If it does not, that is probably because the land buyer had not recognised it. Risks then are identified by the due diligence and a strategy put in place to overcome them.
Collating information
Maintaining a well ordered filing system is an important part of the acquisition strategy. You will need to maintain files of sites you are considering and those you have looked at and for some reason had to put to one side. You should not throw away details of sites you have rejected until you know that another developer is building them out. It is surprising how often opportunities for projects reappear and if you have information on them it could just be useful. The file should retain details of telephone numbers and addresses, sketches, reports and any copies of information that became available while investigating the site. Keeping details of the offer date and terms could be useful.
A telephone number of a relative in Scotland noted on a file once gave me the advantage to pursue a site many had given up on. The site’s owner had taken herself off to live in Inverness. The site became a very successful development.
Today we all use some form of Dropbox for information storage where we can attach plans reports and correspondence to e mails and send them by internet at the flick of a button. This has enormous advantages over the paper filing system of copies of correspondence notes and sketches. Whatever system is employed, the developer must have a system for storage of data on sites he is investigating and retain information on those he has investigated. Information of this kind is valuable.
Maps are an essential reference for the land buyer. Some of the best maps are those that lurk in the back of the Local plan obtained from your local planning department. They are often at a useful scale that shows streets and planning zoning. What better to give pride of place on the office wall as a constant reference. Today we have the benefit of the wonderful Google earth and specialist programs such as Landsearch. What a facility these are. Browsing is an effortless pleasure.
Site assembly
Site assembly is the process of putting a number of land interests together to make up an area suitable for a development site. This may mean parts of two or three rear gardens to make a site for just one new house or it might mean a complex assembly of legal interests, freehold, leasehold and third party rights such as fresh easements and sight lines, or extinguishment of existing rights, to create a much larger site for a multiple housing scheme. Site assembly tests the acquisition skills of the developer. There is inevitably much negotiation involved and it is interesting to experience the wide range of attitudes and motivations in the intending vendors with whom the negotiations are conducted. There are often unequal timing requirements. An urgency to sell from one vendor is almost inevitably countered by an inability to go ahead immediately by another. Then there is the ‘recalcitrant’. Does she really not wish to sell or is she holding out for a higher price? This is a question I cannot answer, only to say that in my experience not everyone ‘has their price’.
Site assembly is one of the great skills of the land buyer and it often results in the acquisition of a site at a more favourable price than an open market purchase of a site that has been assembled given the personal involvement of the land buyer in negotiating with each seller separately. There are a few rules to follow in a site assembly. First is to secure the tranche of land that is the key to the planned site. This will tend to exclude the competition who will not then wish to acquire the remaining tranches of land. This key tranche can be secured by way of purchase or by contract or option and clearly the developer who is prepared to put money down and purchase is in a strong position. The next rule is to be prepared to work with the least number of tranches of land not withstanding that the opportunity exists to acquire a great many more tranches. If a development can be carried out with just three tranches one should not delay by attempting to negotiate further land even though that is the longer term intention. The next rule is to control the negotiation by dealing with each vendor separately where this is possible.
In addition always appreciate that it is often not only freehold land that needs to be assembled to make up the site. There may be easements for laying drainage or sight lines for egress across neighbouring properties. These are third party rights and they can sometimes be just as important as the land that makes up the substance of the site.
Planning History
Knowing the Planning history of a project can be crucial. It could be that where an intending vendor has failed to secure planning permission on several occasions he is likely to welcome an approach from a professional developer willing to take a chance at his own expense. This may give the developer an opportunity to acquire the site on favourable terms. I have very recently developed a site where two planning applications had been made that I considered had completely missed the point and were unlikely to have ever been supported by the planners given the very clear guidance in the local plan. My own proposals recited precisely the objectives of the local plan so were approved without amendment. Consider then that I was able to acquire the site upon favourable terms but also, and importantly, I was pretty well sure that I was not wasting time and money on a chance planning application.
I highly recommend investigating the planning history prior to agreeing terms. This can be done very simply by viewing the local planning authority website.
Meetings
If you are called to discuss proposals at a meeting with an intending vendor perhaps with his advisors then it is as well for you to go well prepared. It is said that there is no point in having a meeting without an Agenda. I agree, and I would go one step further. It is beneficial for the developer to prepare that agenda. In that way he may steer the meeting to discuss his points. You should bring any back up material that will support your case such as comparative sales, legal opinions or construction costings . I have always found that if a sketch plan of the proposed development has been prepared this is an effective centrepiece to the discussion.
It is always good to stick to the agenda and take notes marking who is to action the various points agreed. At the end of the meeting you should summarise the action to be undertaken and confirm that you will email the meeting notes to the vendor or his advisor. In this way you will find the deal moving forward rather than being subject to an ambling discussion centred around the intending vendor’s principal concern. You should date the meeting notes and file on drop box.
Negotiating
There is certainly some truth in what Donald Trump had to say about site acquisition.
The worst thing you can possibly do in a deal is seem desperate to make it. That makes the other guy smell blood, and then you’re dead. The object of the negotiation is to agree terms and a purchase price for the site. Often this will involve agreeing the terms of the acquisition and a Heads of Terms document is prepared to pass to the lawyers on both sides recording the agreement. Never take ‘no deal’ off the table. If the vendor believes that the developer will do the deal in any event the developer has destroyed any advantage he may have had. Negotiating is an art but there is some advice I can give. One must always understand that some vendors will be keen to sell and some keen only if the buyer is prepared to overpay for the site. Most development sites come with drawbacks possibly even risks. The land buyer’s task then is to identify these issues and to persuade the vendor that he is able to overcome them. A simple example is obtaining planning permission. Where a vendor has been offered a sum for a site subject to obtaining a planning permission for a scheme that is in a developer’s opinion unrealistic, it is perfectly in order to say so. It may be that this is what the vendor wants to hear as he wishes to dispose of the site swiftly and does not wish to hang around waiting for a planning permission that is unlikely to materialise. OK, it is equally likely that this vendor wishes to try his luck in obtaining the consent and the enhanced value. A refusal of planning permission in such circumstances will however give an opportunity to return to the negotiation.
Making an offer
The professional way of making an offer is to carefully consider all the costs and ensure that all the viabilities and sketch plans have been prepared. The offer might even attach a copy of plans to a carefully written letter if the deal is to acquire subject to planning permission just to prove that it is the intention to take the matter seriously. Or there is an alternative. I recall one very successful developer who used to visit me when I was a selling agent on the date offers were due and make his offer verbally. He would then judge the reaction and swiftly increase the offer if he felt it needed to be done. Unless the agent states that offers need to be in writing stating various matters to be confirmed one might wish to avoid doing so. Too much information is sometimes what vendors are persuaded by but in my opinion most focus on the offer price. Rarely is the vendor’s decision made straight away. It may need to be compared to alternative offers if there are a number of conditions or indeed if there are a number of vendors such as a family of relatives then it may need to be aired among them prior to acceptance. In such circumstances the vendor or agent may return to the developer seeking confirmation of terms, or commitment to further terms.
One should never be too keen to get a deal agreed at any price. Often the better deals are ‘second time around deals’ that is the first offer has failed to go ahead perhaps through inability to obtain finance or planning permission or perhaps because the party of the successful offer now feels he is overpaying for the site. If a developer is contacted by an agent to ask if he will proceed with his offer as the agreed deal has not gone ahead it is the ideal opportunity to amend the offer slightly introducing a further requirement such as more time to go ahead or to make the offer subject to an additional condition.
When putting an offer in writing for land it should state that it is subject to contract. This means that it is setting out the terms of the offer but that the terms will not form part of a binding agreement to purchase until they are incorporated in a contract for sale and purchase prepared by lawyers. Contracts for the sale and purchase of land have to be in writing and signed by both parties and they have to incorporate all the agreement in one document. That is to say that any promises made that are not picked up in the contract cannot later be relied upon. S2 Law Property Act 2002.
Heads of Terms
When the offer is accepted the developer should volunteer to draw up the Heads of terms that will brief the lawyer the agreed terms of the transaction.
It is useful for the developer to carefully consider a Heads of Terms in instructing his lawyer setting out all the above in clear and considered terms. Failure to do so may result in omission of some important aspect of the developer’s intention.
Instructing lawyers
When a lawyer is to act in the acquisition of property he will need to be aware of the project proposals so that he may look out for any legal restrictions of any kind that would inhibit their implementation.
What are the intentions? The lawyer will be drafting or approving a contract or option agreement so it is essential that he is advised of the terms of the deal. There may be a proposal to allocate communal facilities within the project that will require properties to be granted rights for their use and an obligation to meet part of the costs of maintenance. There may be proposals to extend the site at a later date with the acquisition of contiguous land. Rights of access and easements for services will need to be reserved.
What is the timescale? Is there a wish to exchange a contract as soon as possible or to delay exchange until other matters are settled. There may be time limits within legal documentation that should be taken into account such as an overage clause. Whether the acquisition is to be conditional. Whether the proposal is to access further contiguous land. Is the intention that estate road and drainage be adopted by the local authorities? If this is to be the case then adoption agreements will have to be drawn up by the local authority lawyer and approved by the lawyer acting for the developer.
What is the identity of the acquisition company? Should this need to be altered prior to completion for any reason it will be advisable, for the avoidance of doubt, to have an alienation clause in the contract specifying the ability to assign.
Who are the funders and which lawyer will be representing the funders? The acquisition will require approval from the lawyer acting for the funder and there will be a number of documents that the developer and the funder need to agree.
Conclusion
There is much to consider when sourcing and acquiring a development project. Get it right and the development can reap great rewards. Get it wrong and life can become very difficult. DBS Development Projects we provide site search Initial reports and Development Appraisals in Kent East Sussex and East Surrey. Denis.minns@dbsdevprojects.co.uk.