Landowners: What is a Conditional Contract?
In a nutshell it is a contract which is conditional upon one or more things happening before the contract can proceed to completion.In a nutshell it is a contract which is conditional upon one or more things happening before the contract can proceed to completion.
It is usually in the context of land dealings with a developer. Generally developers won’t enter into an unconditional contract to purchase land unless and until planning consent has been obtained to develop the land. However, before proceeding with a planning application the developer will want to ensure that they have the land under contract so that if their planning application is successful then they will be able to proceed with the purchase of the land. Therefore it is likely that the developer will either enter into a Conditional Contract or an Option Agreement to secure the land.
Set out below are some matters to consider, and be aware of, if you are a landowner who is looking to enter into a conditional contract with a developer:
– Conditional Period:
a conditional contract will be for a specified period of time (referred to as the conditional period) to give the developer time to submit their planning application and pursue a planning appeal if necessary. The initial conditional period can often be extended if there is a pending planning application or appeal – to ensure that the developer is not out of time under the contract simply because of the time it has taken for planning to be used (which will be largely out of their control). We would always recommend that you agree a Long Stop Date – this is the date when the contract will definitely end unless the conditions have been satisfied. This is to avoid the contract continuing indefinitely. During the term of the conditional period the property will be tied into the contract, however if the conditions are not satisfied then the contract could determine without completion occurring and therefore you need to ensure that the initial deposit that the developer pays to you on exchange is sufficient compensation for the time that the property is tied into the contract.
– Obligation to Sell:
During the term of the contract, you are contractually required to sell the property to the developer if the conditions are satisfied (or waived by the developer) – so once you have exchanged contracts, you are bound to the contract and therefore prior to exchanging contracts you need to satisfied with all of the terms of the contract. If you are unhappy with this principle then a Promotion Agreement (which is outside the scope of this article) may be more appropriate.
– Purchase Price:
Either the purchase price will be a fixed sum that is agreed between you and the developer as part of the heads of terms, or the purchase price will be determined by reference to the planning consent (being either a percentage of the open market value of the property with the benefit of planning consent, or a price per acre of developable land).
o Where the purchase price is a fixed sum – you need to ensure that you are happy to receive this figure irrespective of the planning consent that the developer obtains and that this figure takes account the amount of time that the property is tied into the contract (because completion may not happen until near the end of the conditional period). So you may need to consider whether the fixed purchase price should be revised in line with either the retail prices index or the house prices index (so that the sum is effectively worth the same amount years later when the transaction completes).
o Where the purchase price is to be determined once planning consent has been granted – the contract will provide that you and the developer have to seek to agree the price (with the assistance of experts) however if agreement cannot be reached then determination of the purchase price can be referred to a expert to fix this sum. In the event that determination of the purchase price is referred to an expert, you would usually be able to put forward you representations as would the developer, however ultimately it will be for the expert to decide and you would be required to sell the property for the price that the expert determines (even if this is less than the sum you consider the property to be worth).
o It may also be the case that you agree Overage (include link to Overage article) in order to protect you against any future uplift in the value of the land with the benefit of further planning consent or if the sales of the new units exceeds a specified threshold.
– Support the Planning Application :
Some developers may want your assistance in supporting their planning application – this will largely depend upon the nature of the development and the land. If the developer expects any positive action to be taken by you then we would always recommend that this is expressly stated in the contract so that both parties have the same expectations and understanding.
The developer will need access to the land in order to undertake investigations (this can include archaeological surveys, soil investigations, site surveys, various ecology reports). Some of these investigations can take some time and are invasive and therefore will require some works by the developer to make good the land. Depending upon the current use for the land these investigations could cause damage to crops and therefore we recommend that you discuss this with the developer.
– Vacant possession:
Usually developers will expect to purchase land with vacant possession (no tenant and no possessions on the land at the time of completion) and therefore if your land is tenanted you would need to ensure that your tenant vacates on (or ideally shortly before) completion.
The completion date will usually be a period of time after the conditions are satisfied or waived by the developer. Depending upon the current use for the property, you will need to ensure that this is a sufficient time period to enable you to sell the property with vacant possession (whether this requires you to serve notice on a tenant, or for you to find somewhere else to live and be ready to move out on the day of completion).
The matters set out above are in no way a definitive list of considerations but this does at least highlight that conditional contracts are more involved that the usual conveyancing contracts for an unconditional sale / purchase of a house and therefore specialist advice is imperative to ensure that you fully understand the implications of the conditional contract and that sufficient safeguards are included in the contract to protect your position.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.
For specific legal advice on conditional contracts or any other contractual arrangements with developers, contact Claire McSorley in our Real Estate team, or email your query to firstname.lastname@example.org; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/