10 things to consider when agreeing a pre-emption of development land
A pre-emption allows an individual the chance to acquire property before anyone else. In effect it gives the named beneficiary ‘first dibs’. This article focuses on pre-emptions granted in the course of land transactions but they are also widely used in many different corporate, commercial and property agreements where different factors may apply. They are often granted to promoters or developers who, for planning or market reasons, do not wish to enter into contract for the purchase of a site until they are satisfied they can develop it in accordance with their requirements.
1. What type of pre-emption is the most suitable?
Here are 3 examples of pre-emption:
- First refusal: this enables the buyer to buy the land for a value set by the landowner or market value. If the offer is not accepted, the landowner may move onto another prospective buyer. When drafting, the buyer will want an obligation for the property not to be offered to a third party on more favourable terms than the offer in the pre-emption.
- Last refusal: the buyer has a right to match an offer made by a third party to purchase from the landowner, which the landowner must then accept.
- A right to acquire the property at a price to be determined by a third party.
2. What are the triggers of pre-emption being exercised?
This is often the intention to dispose or agreeing terms for a disposal. The landowner will usually be unable to sell the land or exchange contracts for a disposition (typically being a freehold sale (for open market value or not), a gift, a property exchange, the declaration of a trust or the grant of a lease) without first offering the land to the beneficiary of the pre-emption. The buyer needs to be careful the landowner doesn’t narrow the list of triggering disposals which would allow them to circumvent the pre-emption.
3. How much is going to be paid for the land?
The parties will need to decide when drafting whether the purchase price will be set or whether it will be determined by a market valuation at the time the pre-emption is triggered. The parties will need to pay close attention to the assumptions and disregards that should be considered when determining the price to ensure the value of the land isn’t unfairly inflated or deflated.
4. How long can a pre-emption last?
The law on time limits changed on 6 April 2010, and parties can now agree for a pre-emption to last in perpetuity. The old statutory rule that pre-emptions can only last for a maximum of 21 years no longer applies.
5. How long are the timescales?
The parties need to negotiate the length of the pre-emption (see point 4), the time in which the landowner has to serve the offer notice to the buyer and the timescales in which the buyer has to respond before the pre-emption is exhausted. It is important the parties give themselves enough time to carry out any due diligence before serving any notices pursuant to the pre-emption. A property litigator’s advice should be sought when serving notices.
It’s important to note the offer notice can be withdrawn at any time before it is accepted, unless there is an express provision prohibiting such a withdrawal (Tuck v Baker [1990] 32 EG 46). The buyer will most likely want to prevent the landowner withdrawing their offer notice once served.
6. How will you deal with disputes?
The pre-emption should deal with how disputes will be settled between the parties as pre-emptions are tricky and susceptible to disagreement. If the parties fail to come to agreement, they should decide what dispute mechanism should be pursued and how costs will be paid between the parties. Expert Determination is a commonly used dispute mechanism in these circumstances.
7. Who insures the pre-emption property?
Insurance could be a concern for both parties if there are buildings on the land. The buyer will most likely want the landowner to insure the property up until the point at which they acquire the land (it may prove difficult for them to insure as they do not have an interest in the land until the pre-emption is triggered). Whilst the landowner is insuring, the buyer may want the land insured in the joint names of the landowner and the buyer. This may be challenging if the landowner insures as part of a block policy.
8. What land is included in the pre-emption?
There needs to be an accurate description of the land subject to the pre-emption. It is sensible to annex a plan to the pre-emption agreement, particularly if the land is unbuilt upon and does not have a postal address. Any inaccuracy in the description of the property could lead to a dispute.
9. What about SDLT?
The exercise of the pre-emption results in the transfer of a chargeable interest, this means the disposition pursuant to the pre-emption triggers SDLT. The buyer will need to consider whether it is a linked transaction (i.e. linked to any other transaction associated with the grant of the pre-emption) and calculate SDLT accordingly. Upon a disposition under the pre-emption becoming a notifiable transaction, the necessary Returns need to be filed at HMRC and the required duty paid.
10. Will the creation of a pre-emption deter other prospective buyers?
The benefit of the pre-emption should be registered at the Land Registry so third parties are put on notice. The landowner should be mindful that any third party prospective purchasers will be put off by the existence of the pre-emption. Meaning they would be unlikely to spend money on due diligence if another party has a right to buy the property before they can have an offer accepted. This in turn may impact on market value and is often a reason why landowners refuse pre-emptions in development agreements, such as land promotions where the sale price is to be market tested.
Pre-emptions can cause issues for parties when agreeing the terms and when triggering them. This list should be useful starting point when considering what the parties wish their pre-emption to look like.
For more information on the above please contact James Bateman or your ususal Charles Russell Speechlys contact.
