Optimising unproductive land
Housing and renewable energy regularly dominate the political agenda and the treatment of both in the future will continue to be controversial. The Barker Review of Housing Supply states that we need to build around 250,000 homes a year. In 2006/2007 the UK peaked with 219,000 homes being built, however, in 2015 according to the National Building Council this figure was 156,410. The Conservative government appears determined to do better.
Conversely the government shows limited commitment to solar or renewable energy. Indeed, the Department of Energy and Climate Change has started to exclude onshore wind farms from the Renewables Obligation scheme from this April, ending a programme of generous subsidisation.
Nothwithstanding this context, landowners continue to receive unsolicited approaches from third parties offering considerable sums for what might be seen as unproductive land. The reality may be that the land has particular strategic importance because its future use for housing or renewable energy could secure significant income. So what should the landowner do when approached and what are the pitfalls to consider before signing up to receive the unexpected windfall?
In relation to development, in short, landowners should take specialist advice. The ultimate aims of the landowner and developer may not converge. It might be critical that the landowner chooses not only the correct development 'partner' for taking the land through the planning process but also the correct framework in which to do it.
The landowner can just sell the land without planning. The return is immediate but it will not benefit from the uplift in value arising from any future planning consent. An alternative, which is preferred by many housebuilders, is for the landowner to grant an option for the housebuilder to buy the land at its future market value once planning permission for development has been granted. The housebuilder may be obliged to pursue planning and there will be a mechanism to calculate the uplift in value to reward the landowner on sale. However, only the housebuilder can call for the option, so a landowner may be frustrated by factors beyond their control such as market conditions which do not suit the housebuilder or if the housebuilder wishes to delay exercise of the option to concentrate on another scheme.
Landowners may counter this by entering into a promotion agreement with a land promoter. The promoter, unlike the housebuilder does not buy the land but works in concert with the landowner. They will advise on the likelihood of obtaining planning and disposing of the land to third parties. The promoter's incentive is made through taking a percentage of the sale price - but the landowner may be asked to contribute upfront expenditure to secure planning, a cost which is normally met by a housebuilder in the option regime.
The preferred approach of energy companies is to seek an option to take a lease. A nominal option fee is paid upfront for a fixed option period, often one to two years. The rent under the lease is calculated per acre. In the meantime, planning permission is sought.
The leases themselves are typically for a term of around 25 years. This is a considerable time with no early termination right for the landowner (as the energy company must lay out the facility at considerable expense, this protects their investment) so careful thought should be given to the commitment. A lease for a wind turbine should restrict the demise just to the base itself. This will allow other uses around the site which could generate further income.
During the option period, the energy company is granted an exclusive licence to enter the premises for works, such as tests, required in connection with carrying out the development. The landowner should ensure that if the option is not exercised, the energy company pays compensation for damage to any crops and, if it is exercised, on expiry of the lease, the energy company removes all its equipment above and below ground. As wind turbines require deeper foundations than solar panels, reinstatement of the land after the lease term may represent a considerable sum and careful attention should be paid to this by the landowner.
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Public Company Update - November 2020
The November 2020 edition of our biannual Public Company Update.