Seminar notes: Cash flow and tax planning for conditional sale contracts

Practical Law UK Articles 9-201-7669 (Approx. 17 pages)

Seminar notes: Cash flow and tax planning for conditional sale contracts

by Author: Rupert Jones and Practical Law Property

Introduction

Scope and purpose of the seminar

Not a clause by clause explanation

This note is not intended to be a clause by clause explanation of the Standard document, Contract for the sale of freehold land with vacant possession conditional on planning permission:

Such an explanation is unnecessary: a full explanation of each clause and the scope and structure of the document is already provided in the Drafting note.
Any detailed clause by clause examination would quickly be mired in argument over whether the document gives the buyer too much influence and power or whether the document is too pro-seller.

The document has deliberately been drafted to achieve a reasonable starting point for the parties. It is for the parties to negotiate the terms to suit their particular needs.

The cornerstone of the Standard document is to produce something that is both correct and reasonable. It is intended to be a "down-the-middle" document.

Precedents are not set in stone. They are tools that are designed to help busy transactional lawyers. They cannot do so if followed slavishly.

Examination of the themes

This seminar is intended to:

Identify the themes in the Standard document.
Examine the broad principles behind the structure of the Standard document.
Consider the objectives of the Standard document.

Why use this Standard document?

Convention that seller produces first draft

By convention, the seller of land prepares the first draft contract. Probably this goes back to the days when the deduction of title was a major part of the conveyancer's job.

However, there have always been some buyer-developers and anchor tenants who will include in negotiations and provide in the heads of terms, that their lawyers will produce the first draft of the contract.

It will be interesting to see whether the predominant practice of sellers producing the first draft of the contract will change, now that the issue of title is dealt with so differently.

Pro-seller, pro-buyer

This practice of the first draft being produced by one party may be practical but it has led to the first draft typically favouring the drafting party, sometimes to the point of attempting to "pull the wool over" the other party's eyes.

There is generally an expectation that the first draft will be strongly biased and a belief in some quarters that a practitioner is not doing a good job unless the first draft is a "tough one". This approach can make the document difficult and therefore time-consuming and expensive to negotiate, and may lead to distrust between the parties.

It may not be feasible for the parties to sit together to prepare the initial draft, but a more collaborative approach may be more appropriate. Rather than viewing documents as being pro-seller or pro-buyer, the focus should be on whether the draft reflects the transaction contemplated and addresses the needs of the parties. This process may be done through a series of drafts, which become progressively more reasonable. Equally the process could be done through the heads of terms and preliminary negotiations and using a reasonable precedent as a starting point.

The Standard document has been drafted from the point of view of the seller, but "aims to achieve a reasonable balance between the parties" (see, Drafting note: Drafting assumptions).

The drafting note suggests issues for consideration that will help both the seller and the buyer and their respective advisers to determine what changes should be contemplated.

Sellers need to appreciate and understand what the buyer is bringing to the transaction in terms of time, money, effort and risk.

If the seller "overeggs" the document, it is likely to be difficult to negotiate the terms and if the seller ends up with a pro-seller document, then the seller is likely to be losing value through the price. The buyer-developer will only go along with an excessively pro-seller document if confident of making "a killing" at the end of the day.

To illustrate:

When I left Allen & Overy, I joined the London office of Sonnenschein Nath & Rosenthal.  Sonnenschein was the principal external counsel for McDonalds.  At the time, McDonalds was contracting to buy many sites, each contract being conditional on planning. The process, from finding a site, making an offer, obtaining the planning permission and other authorisations and opening, was considerably longer in England than in any other European jurisdiction.   A new general counsel for McDonalds asked how we could improve the process.   My response was to suggest that McDonalds should produce a reasonable contract.

I had seen from previous deals that if McDonalds wanted a contract conditional on planning they would argue with the landowner over their draft for weeks, if not months. McDonalds' negotiators always imposed in the heads of terms that the starting point would be the McDonalds' form of contract.   It was clear that there were a number of points in the McDonalds' form that landowners found very difficult to accept and which, in a significant number of cases, McDonalds would eventually concede.

I suggested that McDonalds should start with a contract "straight down the middle", so that all we were only dealing with the actual site and deal specifics.  Unfortunately, this did not find much favour. Shortly after, Sonnenscheins closed in London. I do not believe my idea was taken up but I still believe that it was the right solution.

Use of the drafting note

The drafting note is, perhaps, where the real value lies:

If the Standard document is being used as a starting point for preparing the first draft, the drafting note identifies drafting issues that should be taken into account.
If the first draft has been based on the Standard document, the drafting note identifies issues that the recipient party should consider in responding to the first draft, and that both parties should consider in further negotiations.
If the Standard document has not been used as a starting point for preparing the first draft, the drafting note still has a value for both the seller and the buyer. It benchmarks and analyses the actual working draft and identifiesissues that should be taken into account during negotiations.

Further information

For information on title investigation, see:

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Practice note, Deducing title.
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Practice note, Investigating the property: Title investigation.

Practice note, Investigating the property.

Practice note, Seller's duty to disclose information about the property.

Practice note, Implied covenants for title.

Practice note, Dealings with registered land under the Land Registration Act 2002.

Practice note, Exempt information documents.

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Checklist, Investigation of property.
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Why a conditional contract at all?

Why do we use conditional sale contracts? What does the buyer gain? What does the seller gain?

What does the buyer gain?

The buyer gains a great deal:

The buyer is given the first opportunity to get the planning permission.
The buyer will generally obtain considerable control over the process of the transaction and the potential development.
If the deal goes "pear-shaped", the buyer can walk away having invested both time and money, (perhaps considerable sums if the planning application goes to appeal), but not the cost of buying the land.

What does the seller gain?

This is a much more difficult question because the conditional sale contract model means that the seller:

Loses control of the transaction.
Risks losing a lot of money.

Does this mean that the seller should not go down the route of the conditional sale contract?

The conditional sale contract may still be appropriate. There may be particular advantages in the buyer applying for planning permission. For example:

The buyer may have some particular expertise and may have obtained planning permission in similar circumstances several times before.
The buyer may have a particular working relationship with the local authority and may be able to trade another planning permission on a site, which is less attractive than this one.

Where the conditional sale contract is appropriate for the deal, there is much to be gained by the seller's lawyer coming on board as soon as possible, and even before other advisers.

In this day and age of increasingly having fixed fees or capped fees and lawyers undercutting one another, the ultimate objective for a lawyer (apart from avoiding being sued for negligence) is being able to charge a premium fee. In my view, a lawyer can justify a premium fee if the lawyer can bring commerciality to the deal. The seller's lawyer can bring real value, which ought to command a premium fee, if the seller's lawyer is the real transaction manager. The Standard document, Contract for the sale of freehold land with vacant possession conditional on planning permission is a valuable aid to that role.

Despite pressure from surveyors and buyers, it may be that a conditional sale contract is not the most appropriate way forward. It will be for the seller's lawyers to identify this and alternative approaches.

Other options for the seller

In a recent conversation I had with a property director of a substantial pub business, about the need to sell on properties that were underperforming as pubs, the question arose whether the conditional sale contract was a mechanism that was much used.

In that operator's view, the complexity of entering into a contract conditional on planning was not, in most cases, sufficiently attractive because there was little chance of a material increase in the resultant value. Out of a portfolio of 150 sales over the last two or three years, there had only been two sites where their disposal was conditional on planning.  These were exceptionally more valuable than the average disposal figure, three times in one case, nine times in another.

In most cases, the alternative use for an existing property was well known and the chances of a particular planning application being refused or conditions imposed, which would have a material effect on the value, were very small. There was little to justify the developer entering into a conditional sale contract.

Before deciding what course of action to take, the seller and the seller's advisers should run a "sanity check" on what is the best course of action.

Outright sale

It may be preferable for the seller to insist on an outright sale to the buyer and for the sale price to reflect the risks being taken on by the buyer.

Benefits for the seller

Greater certainty for the seller.

Disadvantages for the seller

The seller may lose out on a share of the value of the land as enhanced by the planning permission and subsequent development, unless complex overage provisions are incorporated into the contract (see Practice note, Overage payments and Standard document, Positive overage covenant with restriction and accompanying Drafting note).
It may take the buyer a long time to exchange contracts because the buyer will generally be keen to carry out an investigation that is focused on the potential for getting the requisite planning permission and being able to carry out the development.

Seller goes it alone

Despite the government's intentions, the latest changes in the planning legislation retain, at least for the moment, the concept of outline planning permission.

The seller may prefer to obtain outline planning permission and sell the property with the benefit of the outline planning permission. This effectively puts down a benchmark for a potential buyer as the minimum sort of development that can be obtained for that property.

This will require the seller to create its own team of advisers, planning consultants, surveyors, architects and others, as necessary, to put a scheme together, to seek an outline planning permission.

Any purchase of the property with the benefit of that outline permission will then be an outright, unconditional purchase without the risks and difficulties involved in a conditional sale contract.

Alternatively, the seller may go on to develop the land and to sell the land in its developed state.

In taking this approach, the seller bears the cost of fees in obtaining the outline planning permission, but the seller's team can, ideally, achieve a real increase in the value for the land.

Benefits for the seller

The seller retains control of its own tax liabilities.
The seller may retain control over the effect of the planning development on perhaps adjoining land which the seller is retaining.
The seller is better able to back off if the seller sees things are going wrong, if the development is premature or if it may lead to consequences concerning environmental clean-up, and so on.

Disadvantages for the seller

The seller may not have the requisite expertise or interest in development, which may affect the seller's ability to get planning permission in the first place.
The seller may not be able to finance the development.
The seller may require a more immediate financial return on the land.

Structure

Historical approach

Cynically, I wonder whether in those cases where the lawyer is acting for a seller, the first the lawyer hears about the proposed sale is when the client rings up to say a surveyor friend has suggested that the client's land is ripe for development, that a lot of money could be made and the surveyor has heard that there is a particular developer who is very interested in the land and will pay loads of money. In other words, it's a done deal. The client's enthusiasm is so great: the draft contract has to be out that evening; it's going to be a simple piece of paper; don't worry about anything!

What does the lawyer do?

Historically, in too many cases, the lawyer took a standard sale contract and added a clause to make the contract conditional, and perhaps some simple obligation on the buyer to obtain the planning permission. Over time, this type of arrangement has become more sophisticated with bits and pieces being added on: the old "cut and paste" method of drafting.

Clean sheet: reasonable approach

PLC Property started with a clean sheet and a strategy to propose a reasonable contract. The objective was to achieve a reasonable, down-the-line document that would result in shorter, more focused negotiations:

The negotiations themselves concentrate on the real commercial issues.
The legal and technical discussion is on the site or deal specifics.

There is a lot of commonality between the approach and what the parties want, so wasteful arguments between the lawyers are avoided.

Finance and taxation are key issues that need to be taken into account. There are two concerns, which together mean that a conditional contract may be more efficient, provided that the contract is truly conditional:

Stamp Duty Land Tax (SDLT), which will primarily be of concern to the buyer.
Chargeable gains, which will primarily be of concern to the seller.

SDLT

The structure of the Standard document is set against the background of some fundamental changes in real estate practice. The document recognises changes in stamp duty: that we no longer have a tax based on documents, but a land tax (SDLT) based on transactions. This is also coupled with an increase in that taxation from 1% to 4%.

Before you think "well, I am acting for a seller, this is not the seller's problem", you need to remember that from a seller's perspective, the objective is to leave "on the table" as little money as possible and to take as much money from the buyer as practical and, if SDLT is triggered at the right point, there may be more left over for the seller.

In most cases the SDLT liability for the buyer will arise on completion. However, if, for whatever reason, there is delay between the effective date and completion, and during that period the buyer goes into possession and commences works, there is every likelihood that the obligation to make the Land Transaction Return and to pay the SDLT may arise at that earlier time.

Does it matter? Of course it matters. There are criminal sanctions, penalties and interest to be paid if returns are not made on time or if duty is not paid on time.

It is worth setting out what the Drafting note says about the SDLT issues.

SDLT

The charge to SDLT arises on the acquisition of a chargeable interest. The general rule is that there is no land transaction at the contract stage where the contract will be followed by a conveyance. Contract and conveyance are taken as parts of a single land transaction and the effective date for SDLT purposes is the date of completion (section 44(1)-(3), Finance Act 2003 (FA 2003)). As a general rule, the liability to SDLT will arise at completion and the Land Transaction Return and any SDLT due will have to be submitted or paid within 30 days of the date of completion.

However, if the contract is "substantially performed" before it is completed, the date of substantial performance is taken as the trigger date and the Land Transaction Return and any SDLT due will have to be submitted or paid within 30 days of that date (section 44(4), FA 2003).

A contract is substantially performed when either of the following occur:

The buyer or a person connected with the buyer takes possession of the whole or substantially the whole of the land.

The whole or a substantial amount of the consideration is paid or provided.

(Section 44(5), FA 2003.)

Whether there has been substantial performance will be a matter of fact and each case will be judged on its own merits.

By structuring the document so that the obligations to buy and sell the property do not come into force until the planning condition precedent has been satisfied, (so that the buyer has no interest in the property until the planning condition precedent has been satisfied), the risk is reduced that HM Revenue and Customs will argue that there has been substantial performance of the contract based on either occupation or on the payment of the Initial Price [defined in the Standard document and Drafting note].

To be successful in establishing substantial performance, HM Revenue and Customs would have to show that one of the following:

That the buyer is in occupation of the property.

This could be evidenced by the buyer or its contractors or surveyors going onto the property to carry out investigatory work, such as digging site inspection holes in connection with the process of obtaining planning permission. It would not matter that the occupation would be temporary. If the completion does not ultimately occur, any SDLT paid to HM Revenue and Customs will be recoverable by the buyer.

To date, however, there has been no published attempt by HM Revenue and Customs to argue this.

That the Initial Price paid by the buyer to the seller constituted a "substantial amount of the consideration".

The meaning of "substantial amount of the consideration" is generally taken to be payment of 90% of the consideration (paragraph 7950, Stamp Duty Land Tax manual (HM Revenue and Customs)). The 90% figure does not appear in the legislation: it appears in the Stamp Duty Land Tax manual (and the manual is not a statement of the law). It therefore remains to be seen how payments of under 90% will be treated.

The Initial Price is not expressed to be part of the consideration paid for the Property; this is reinforced by the structure of the document. There may be more risk if the sale and purchase provisions come into effect on exchange of contracts. There is again no published evidence that HM Revenue and Customs will take such an approach.

For more information on SDLT and substantial performance, see:

Practice note, SDLT and property transactions.

Practice note, SDLT and contracts and transfers of land.

Practice note, SDLT and development agreements.

Chargeable gains

The seller should be concerned by capital gains tax.

A seller may take the view that the increase in value of the land due to obtaining planning permission is so great that the fact that the seller has pay up to 40% to the government to pay for the street lamps is acceptable.

Some conditional contracts that I have seen, arguably result in the liability to pay capital gains tax before it is certain that the cash to pay for that liability will be received from the buyer. Timing is important.

Advising the seller, you should be hoping to avoid liability for your client for capital gains tax until you are certain that the seller will have real cash actually to meet that liability. You do not want to have a deemed disposal or an early disposal creating a tax liability and then, for some reason, the contract fails and you have to unscramble it to try and get the money back.

Again, it is worth setting out what the Drafting note says about chargeable gains.

Under the Taxation of Chargeable Gains Act 1992 (TCGA 1992), tax is paid in respect of any gains accruing on the disposal of assets, which are not taxable as income (they are "chargeable gains"). Tax on chargeable gains can be either capital gains tax (for individuals and trustees) or corporation tax on chargeable gains (for companies).

There are special rules to determine when a disposal takes place (section 28, TCGA 1992). Section 28 does not deem there to have been a disposal, but merely states when the disposal is made, if at all (see Legal update, Capital gains tax: time of disposal).

Where an asset is disposed of pursuant to a contract, the time at which the disposal is made is deemed to be the time at which the contract is made, regardless of when completion later occurs, provided that it does occur (section 28(1), TCGA 1992).

Where the contract is conditional, the date of the disposal is the date that the condition is satisfied (section 28(2), TCGA 1992).

If the contract is not conditional, the seller will be treated as having disposed of the property on exchange of contracts and will be required to account for tax due on any chargeable gain in the seller's tax year in which the disposal occurred:

If completion does not take place until the following tax year, the seller may face cashflow problems (it will not have received the purchase price until completion), and administrative difficulties (for example, if the purchase price is not fixed until it is known that planning permission has been obtained so the gain cannot be calculated exactly).

If completion does not take place at all, the seller faces additional complications, having to recover the tax already paid.

If, on the other hand, the contract is conditional, the seller will be treated as having disposed of the property when the condition is satisfied (that is, when satisfactory planning permission is obtained). The cashflow and administrative difficulties are very largely avoided.

Condition precedent

The Standard document also recognises that a well drafted document should make quite clear which parts of the contract should be legally binding on day one, and which parts should only become legally binding when necessary.

The whole purpose of the Standard document is to ensure that the timing is right for CGT liability and for making SDLT Land Transaction Returns.

The Standard document:

Clearly provides for those provisions that need to have immediate legally binding effect to become effective: the obligations on the buyer to apply for planning permission and to keep the seller informed, with regard to getting planning permission, keeping the seller informed and going to appeal if necessary.
Endeavours to ensure, so far as one can, that there is not a disposal for CGT purposes until the effective date. Once you have the effective date, you have an acceptable planning permission and can go forward. You can be as certain as you ever can be that there will be a successful outcome.

Once again, it is worth setting out what the Drafting note says on the conditionality.

Chargeable gains and SDLT

There are two types of condition:

A "condition precedent", which refers to something that must happen before the contract can take effect at all.

A "condition subsequent", which refers to a condition that has to be fulfilled when carrying out the contract, but which will not strike at the root of the contract. Non-compliance with a condition subsequent will not render the contract ineffective but, generally, will give rise only to a claim for damages. The inclusion of a condition subsequent will not make a contract a conditional contract.

On the assumption that the parties will want the obligation to obtain planning permission to be a condition precedent, the Standard document aims to make it as clear as possible that the condition is indeed a condition precedent:

The provisions dealing with the obligation to obtain planning permission are placed together at the beginning of the contract.

The provisions of the contract that deal with the obligation to buy and sell the property are stated not to come into effect until the "Effective Date", being the date the obligation to obtain planning permission is effectively satisfied.

To support this structure, the contract provides that when the contract is entered into (that is, on exchange of contracts), the buyer is required to pay the seller a sum, which is non-refundable by the seller.

Once the planning permission is obtained and the rest of the contract provisions become operative, the buyer is required to pay the deposit.

Money

The Standard document has been drafted so that on exchange of contracts, an Initial Payment (defined in the Standard document) is made by the buyer to the seller. This is non-refundable in the event that the planning permission is not obtained and the sale does not proceed to completion. The payment of the Initial Payment supports the structure of the Standard document.

Once planning permission has been obtained in satisfactory form (the Effective Date), the buyer becomes liable to pay the deposit (a percentage of the Purchase Price) and then will pay the balance of the Purchase Price on completion.

Initial Payment

If the Standard document has a fault, it may be in that it does not give much assistance as to what the Initial Payment should be, beyond a warning that it should not constitute a substantial amount in case it triggers substantial performance for SDLT purposes (see notes above). This, however, is an issue that is so deal specific, it really needs the full attention of the parties, who need to consider the following:

One argument is that the Initial Payment should be merely nominal.
Another view is that this Initial Payment should reflect the fact that, in effect, the property has been taken off the market and amounts to lost opportunity costs, but if the Initial Payment is too high:
- the buyer will object: the money will be "dead money" as far as the buyer is concerned;
- the payment may be treated as a capital sum, that is, it may be treated as a partial disposal for the purposes of Capital Gains Tax. It may, therefore, need to be less than the annual exemption if it is an individual that is selling.
- there may be "substantial performance", triggering the buyer's SDLT liability.

Somewhere between these two extremes, is the seller's need for the Initial Payment to cover at least an element of the expenditure that the seller has incurred in preparing the property for sale by:

Dealing with an initial analysis of the property by surveyors.
Having preliminary discussions with planning consultants and architects.
Incurring legal costs to cover the period up to exchange.

The whole discussion as to what this Initial Payment should be is where the lawyer can add value, which may help to justify the legal fees.

Purchase Price

The Standard document assumes that the Purchase Price will be the higher of a fixed value and the market value. The guidance notes suggest that the Purchase Price itself can be as complicated or as simple as the parties want it to be.

In a simple case, when the parties can estimate what the land value would be with the desired planning permission, a fixed amount may be all you need. Again, the individual circumstances of the seller and the buyer, the actual property, the timing and the market, are key. There are hundreds of variables.

In such cases, hindsight is, of course, a wonderful thing. Each scenario has advantages and disadvantages for the players, there is little commonality because at the end of the day the seller wants the most money, the buyer wants to pay the least. Compromise means that neither side will be satisfied.

The seller will always calculate what the buyer can be expected to make out of the property; the buyer will always feel that planning took longer, that land prices have fallen (or risen more slowly than originally envisaged), development costs will be higher and his profit will be less, and so on.

If the purchase price is too great and the seller takes too much money off the table, there is less likelihood that a buyer will accept what will otherwise be an unacceptable condition. If the seller "overeggs" it, the buyer can always walk.

Without dealing with the detail of the contract, the more detailed the list of unacceptable conditions are, the greater flexibility the buyer has to walk. If you are dealing with a sophisticated buyer you may have a whole host of planning conditions which are unacceptable.

You also need to consider the mechanics to fix the market price. Obviously, if value is contentious, you need to have a mechanism with third party determination to avoid an agreement to agree. It is important to get this right as it is the time when the seller can "smell" the money. Again, try to keep it simple. Try to control both sides' expectations. It will never be enough for the seller; it will always be too much for the buyer.

Although the draft refers to overage or clawback, if the definition of the development is detailed enough, then I am not certain that the seller will need to reserve an overage or a clawback payment. The seller should be reasonably hopeful that, once planning permission has been obtained for the development, the resultant permission will create a sufficiently high value that any overage/clawback provision will simply be unnecessary.

Further information

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Initial Payment (clause 4).

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Deposit (clause 19).

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Calculation of the Purchase Price (clause 16).

Go, no go

Buyer wants out

What if everyone has given as good as they can, planning is refused, or is granted subject to conditions that no sane buyer will accept, and the seller is left to pick up the pieces?

Whether or not a particular condition is an unacceptable planning condition is not necessarily an automatic decision. As the drafting note says, it is perfectly reasonable for the parties to agree, at that time, that the contract is terminated but that is a decision which should be taken at the time, not when drafting the document (see Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Planning Appeal (clause 7)).

Key to this part of the process may be the independent surveyor.

Expert determination or arbitration?

Personally, I think this is an area where, provided you can be reasonably certain about the expert, you should go for expert determination.

To be certain about the expert you can always pre-identify two or three suitable candidates. It only becomes an issue if none of the identified people are actually available at the time, which is unlikely.

The buyer may want the perceived benefits of an arbitration in certain circumstances. For example, if the development is substantial and the buyer is concerned that an expert may hold that a condition is acceptable.

The issue whether to go for an expert or an arbitrator is not a buyer/seller issue, but depends on all the circumstances. The standard document is only a tool, the drafting note helping in the process of getting the parties to think about the issues (see, Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Independent Surveyor (clause 8)).

Buyer insolvency

If the buyer goes bust, the advice to the seller is "don't panic".

If there is real value in the contract, and thus in the development scheme, it is likely that there will be someone who will pick up the pieces and will carry on working it through.

Although the standard document envisages that the buyer cannot assign, the seller will no doubt, if it is to its advantage to do so, agree to such an assignment in appropriate circumstances.

The insolvency practitioner will be out there trying to sell on the contract, and the reality is that the seller will agree to an assignment, if that is in its own interest.

On the other hand, particularly because of the alienation controls, the seller should be able to take over the arrangements and do a deal with the insolvency practitioners for the buyer, for example as regards the professional team.

Planning

Who makes the planning application?

It is not uncommon for people to forget that an application for planning permission can be made by anyone. You do not need to have any interest in the land to make the application, although if the applicant does not own the land, the applicant must give notice of the application to the actual landowner.

If the buyer is making the planning application, it will need to be certain that all the land needed for the development is owned by the seller and covered by the contract:

We have all experienced the nightmare when suddenly you realise that the visibility splays required by the highways authority are on land not owned by the seller or not covered by the sale contract.
We all know of cases with ransom strips or odd pieces of land that are not in the title, and are just missed until too late in the process.

Control of the planning process

If the seller decides to go down the route of selling the land subject to the buyer getting planning permission, the seller has passed control to the buyer and the issue is how much control and what checks the seller will have. In the Standard document:

The notification procedures and provisions aimed at keeping the seller informed of progress, are all reactive.
The running of the planning application and the timing will be very largely determined by the buyer.
The buyer's agenda for timing may be completely different from that of the seller's, and may change during the course of the transaction:
- the seller's property may be the only appropriate site for the buyer's proposed development at the time the buyer enters into the contract, but this may suddenly change, giving the buyer further options and influencing both the timing and the buyer's overall conduct;
- there may have been a huge demand for the particular type of property being sold by the seller, but during the planning process, the market may change;
- it is quite likely that the planning process will take longer than envisaged, during which time the market may have peaked and the buyer may want to delay everything.
The buyer may not want to appeal: the buyer's enthusiasm to appeal may rest on a different analysis to that of the seller.

Effect of planning performance targets

We live in an age where there are league tables for everything and there is a stick and carrot approach by central government to ensuring the appropriate delivery of services by local government.

Local authorities are being given instructions by central government to speed up the planning process.  This means making planning decisions on applications within the appropriate time limits.  If those time limits are not met, the local authority gets a "black mark", and if they get too many black marks, the local authorities live in fear of having their government grants reduced or additional payments not made.

As a member of the Planning and Environment Law Committee of the City of London Law Society, I have heard about a number of occasions where negotiations for planning have been unilaterally terminated by the planning authority even though everyone was extremely close to completing the negotiations.  In these cases, the negotiations appear to have been terminated solely because there was a danger of the decision not being given within the time required, so triggering an adverse report back to the Office of the Deputy Prime Minister.

This can often happen completely out of the blue because it is a management decision taken by managers in the planning group or by those having a finance function within the local authority, and nothing to do with the case officer or his immediate superiors.

The local authorities are playing the rules to protect their position with regard to their grant entitlement. The fact that the applicant for planning permission suffers, does not matter as far as the local authority is concerned, but it will matter for the applicant, be the applicant the buyer or the seller.

Should the planning application be made in joint names?

The Standard document suggests that by making the planning application in the joint names of the seller and the buyer, the seller is able to protect its interest if the buyer decides to withdraw and the seller is unable to force the buyer to stick with the application.

The seller will be concerned if the buyer withdraws, even if the seller has lost relatively little in terms of costs and time. The papers from the application, the outcome of the application, the discussions with the officers, and so on, will all be on the planning file. If the application does not succeed, such refusal or withdrawal, or whatever it may be, will be on the planning file, which will influence what happens to the land going forward. This gives the seller a particular interest in the situation because, if the land is not sold, all the problems come back to the seller.

There are a number of problems associated with a joint application, assuming always that the buyer is happy in the first place for the application to be made in joint names:

The buyer's co-operation is required to hand over papers, to give access to information and meetings to the seller.
The development application drawings will belong to the architect, who may retain design rights in them. The seller will need to be able to use these drawings to continue with the application and any appeal.
At the end of the day, the degree of involvement required by the seller, if the seller is to take over the application, may mean that it is more appropriate for the seller to make the application itself and sell the land with the benefit of planning permission.

One of the issues to be taken into account in determining the amount of any Initial Payment, is that it is a sufficiently large amount to compensate the seller for all the time, expense and difficulties associated with the buyer withdrawing, leaving the seller with either a failed application on the planning file or having to pursue the application and any appeal in its own name.

Further information

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Planning Application.

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Planning application (clause 6).

Drafting note: Contract for the sale of freehold land with vacant possession conditional on planning permission: Planning Appeal (clause 7).

Environment issues: kicking the sleeping dog

In this country we have a realistic approach to the cleaning up of contaminated land.

As a society, we have, potentially, a substantial liability to clean up our historic land contamination. All governments, however, have so far accepted that the cost of cleaning everything up would, in the short term, have such a devastating effect on the British economy that it would be the "road to ruin". For many years, the whole thrust of government policy has been on the basis that clean-up should occur when the economics allow it.

Planning application may be a trigger for clean-up

You have a piece of land. It may not have been built on before or it may be a brownfield site. There may be an awareness that there is a potential environmental issue but no-one is certain how bad it is. Making a planning application for the redevelopment of that land is a trigger for a reassessment of the priorities for requiring that site to be cleaned up, and perhaps the need for an environmental assessment or environmental audit. The authorities can become aware that the contaminated land problem is more serious than originally thought, and has the potential to become more serious given more time.

Historic contamination - the seller's nightmare

The seller's nightmare is the need to deal with historic contamination.

The fact that the environmental issues turn out to be more substantial and therefore more costly to remediate, may surprise everyone, including the seller. The economics of the proposed deal go out of the window as far as the buyer is concerned.

This may not be the end of the story for the seller. Conditions may have been attached to the planning permission, making provision for what has to be done to clean up the land. Preventative measures may be needed to stop a contaminant escaping and to contain things on a temporary basis.

The seller may lose the buyer and the potential sale price for the land.
Everyone will then be aware of the environmental issue, which will affect any attempt to redevelop using a different scheme with a different buyer.
There may be a requirement by the Environment Agency or the local authority that money is spent immediately on a clean-up, irrespective of whether the land is to be redeveloped.

Having gone into a transaction in the hope that there will be a "crock of gold at the end of the rainbow", the seller finds itself subject to immediate liabilities and unable to sell or redevelop the land to avoid the liability.

Who will the seller blame? The seller's nightmare becomes the lawyer's nightmare.

The lawyer's nightmare

What can be done to avoid the unexpected environmental issues becoming the lawyer's nightmare?

It may be that, in fact, there is very little that the seller's lawyer can do to avoid the buyer discovering environmental issues and the deal collapsing. The lawyer's concern, however, is to ensure that the seller client is sufficiently well informed throughout the deal, so that the seller is aware of the potential risks and is perhaps more realistic and better able to negotiate terms and price.

Depending on the nature of the property and the proposed deal, it may be appropriate for the seller to have carried out some investigation of the land itself, so it knows what the buyer may find when the buyer carries out its property investigation.
Depending on the proposed development, the seller should be aware of the potential for an environmental assessment to be required, and the implications that the assessment may have on the grant of planning permission.

Further information

For further information on property and environmental investigation, see:

Practice note, Investigating the property.

Practice note, Searches: Environmental data.

Practice note, Environment: asset purchases.

Article, Ensuring environmental compliance

For further information on Environmental impact assessements, see Practice note, Environmental impact assessments and planning applications.

Conclusion

The role of the standard document

This Standard document has been designed for use by intelligent lawyers. It is not a one-size-fits-all document. It is intended to ensure, in a cost-effective way, that the deal is done on the correct and appropriate terms and that the parties will be happy.

Before it is used, the lawyer acting for the seller must always ask, "Is this the right structure for this transaction?" It is the seller's lawyer who will add value to that process by taking the seller through the issues to identify whether the standard document is indeed the most appropriate starting point:

Should the seller actually be trying to make things more certain?
Should the seller be talking to the planners?
Should the seller be working on an outline planning permission?
Is there something so special about the expertise or position of the particular buyer that makes it better for the planning application and the development to be controlled by the buyer:
- perhaps the buyer owns a ransom strip so there is nobody other than the buyer who can take the development forward;
- perhaps there is something special about the land itself or the proposed development?

As intelligent and experienced lawyers, we should not be afraid of the question "why?"

We should remind ourselves, on every transaction we do, of the story of the emperor's new clothes. Everyone around us may be saying that this is the most wonderful deal and the only way to do it is by a contract conditional on obtaining planning permission, but we should be asking:

Why is that?
Does this structure provide everything the client needs to achieve its objectives?
Do we really know what our client's objectives are?

That is part of the fun of "lawyering", which is sadly lacking in so many transactions.

Control

Everything about this contract is bound up with who loses control, whether such control can ever be recovered and, if so, on what terms. Ultimately, this is about risk and reward.

The more risk that the seller takes, for example, by losing control, or the buyer takes, in being obliged to purchase a property subject to a less attractive planning permission than hoped for, will have an effect on how the money "on the table" will be divided.

Remember, at the end of the day, if your client makes more money than expected out of the transaction, there is a possibility that the client will be happier, or, at least, less unhappy, in paying the lawyer's fees.

In this day of fixed fees and great competition, the best deal with the best result is one where the client is sufficiently happy and sufficiently satisfied with what the lawyer has done that the client is willing to repeat the exercise and give you some new instructions!

Seminar notes: Cash flow and tax planning for conditional sale contracts | Practical Law