One alternative is a development agreement, something that is becoming increasingly common especially if the land in question is going to be considered for a residential scheme.

What is a development agreement?

A development agreement is essentially a type of joint venture whereby the landowner allows a developer to build housing and associated infrastructure on their land. When complete, the landowner receives an agreed number of finished homes as a consideration in kind instead of a financial payment.

Under this arrangement – if planning permission is not already in place – the landowner and developer initially sign a conditional contract which outlines the obligations to enter into the development agreement.

Once planning permission is approved – and assuming it is satisfactory to the landowner – the contract becomes unconditional and the developer is obliged to carry out the work.

The landowner is ‘paid’ in completed housing stock, while the remainder of the homes are kept by the developer to sell, either as affordable units to a registered provider and/or on the open market.

Development agreements in action

Development agreements are becoming more common as landowners, developers and agents consider alternative ways to help deliver new homes.

The approach is increasingly popular with regional and SME developers, who are more susceptible to market fluctuations related to viability and the cost of finance.

Over the last 18 months or so Savills has used development agreements to great effect, helping facilitate deals for several sites – including on land to the north of Newmarket Road in Cambridge.

Why choose a development agreement?

For landowners who don’t require an immediate financial payment, development agreements can be an attractive option – allowing them to obtain built stock which they can keep as part of a private rental portfolio for a recurring income.

The landowner will also typically retain a strong element of control over the quality of the development in question, potentially helping to shape the style of homes, the layout of the scheme and the nature of materials used.

Before entering into any such agreement it is important for the landowner to seek specialist financial advice as there may well be implications related to stamp duty, capital gains, income tax and VAT. However, certain structures can be put in place to help mitigate any potential liability.

It may also be necessary for the landowner to keep some form of security, such as restricting the sale of private units until all the agreed properties are built and handed over.

For the developer there is a clear advantage in not having to make a financial payment upfront.

For both parties it is important to establish a timetable that sets out dates for the delivery of the retained units, the sign-off process for surveying the built stock, the deadline for when any snagging issues need to be addressed and when the final handover should be complete. The agreement will also include any penalties for missing agreed dates to ensure timely delivery. In some cases this is the equivalent of the anticipated monthly rental.

Greater flexibility for landowners and developers

With developers keeping a closer eye on rising costs and cashflow, it is becoming increasingly important to consider a range of options that offer greater flexibility for landowners and housebuilders alike.

Of course, it's always important to seek professional advice before deciding on the best course of action. But when planned correctly, development agreements can be an effective way to remove the need for upfront payments from the developer, whilst providing an alternative source of income for the landowner and ensuring the housebuilder delivers a high-quality, design-led scheme.

Further information

Contact Max Fahie or Ben Rudd