Uplift Clauses Explained

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Nowadays, it seems that anyone who sells a house with a bit of ground, or a paddock in the middle of nowhere is terrified that they may miss out on a bonanza in the future. Uplift clauses – also known as overage or anti-embarrassment clauses – have become routine. Sometimes they are justified. Sometimes they are a plain nuisance. Where is the dividing line?

There are two key areas of concern. The first is the drafting of the clause. The second is the mechanism to protect the potential payment.

Uplift clauses are intended to give a previous owner of the property a share in future development value, when that value is realizable. Typically, an overage payment is 25% of any increase in value attributable to the grant of a planning permission, if the triggering event occurs within a period of 25 years. Both the percentage and the period can vary. It is more important to define the type of development that will trigger a payment, however, and when the payment is to be made.

Development is usually defined as being residential development, as this is perceived as creating the most value. It could, though, include equestrian, commercial or industrial. It is usually easy to spot what the seller is focused on.

More tricky is the question of when the payment is to be made. Frequently, the draftsman will stipulate that payment should be made within a certain period, say 28 days, after the grant of a relevant planning permission. This is seriously bad news for the person on the other end. He may not have the funds readily available to pay. The planning permission may be subject to appeal or judicial review. It may contain onerous conditions which, whilst the permission increases the value of the land, render the permission unattractive. The permission might have been applied for by a third party. In other words, it may not be a “bankable” consent.

The only safe option for the buyer is to ensure that payment is made on the earlier of:
The implementation of a planning permission – such as when someone starts digging foundations. There would be time to arrange funds to make the uplift payment; and
The sale of the property with the benefit of a planning permission. The uplift payment would be funded from the proceeds of sale.
A well advised buyer will ensure that he agrees uplift provisions which are fair and balanced. That assumes the opportunity to negotiate. Beware the auction scenario, where buyers are offered the chance to bid for the property – or not. They generally do not get the right to negotiate the drafting of contract terms.

The mechanism for protecting uplift payments has repercussions on future conveyancing of the land throughout the uplift period. This is because the original covenant to pay the uplift is a personal covenant between the original seller and the original buyer. The seller cannot enforce this obligation against subsequent buyers unless he takes a new covenant from each and every one of them. Accordingly, he will arrange for a restriction to be placed on the register, so that the property cannot be sold unless his solicitor certifies that the buyer has covenanted to observe the uplift provisions. This adds to the cost of conveyancing, and can cause delays. This is frustrating, especially when there is no realistic prospect of development, or no intention to develop.

On a more positive note, uplift clauses are frequently used where there is real potential for development, or where actual development value has been generated by the grant of planning permission. Permission might be granted for, say, residential development with a low density, or some other limiting condition. This will most likely give rise to a sale of the land, and the price will be governed in part by the terms of the permission. The seller might want to ensure that he has the benefit of any increase in value if a more valuable planning permission is granted in the future. This is a more appropriate use of an uplift clause, to protect the seller’s legitimate, and realistic, commercial interests. Careful drafting, and explanation, are essential and these are legal areas that Beaufort Montague Harris Solicitors can advise on.

Strategic Land – Opportunities and Pitfalls

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Strategic land is rightly seen as a somewhat esoteric and specialist branch of commercial conveyancing, much of it shrouded in jargon and prone to abrupt change. Whilst it is no place for the faint hearted, nonetheless there are certain broad concepts which are easily understood, both by the non-specialist lawyer and by the lay client.

For the landowner who has a parcel of land which may have development potential, it is absolutely critical that he chooses not only the correct “partner” for taking the land through the planning process, but also the correct contractual framework. There is an array of possibilities available, and much will depend on how likely and imminent a planning permission is. If the land has already been allocated within a Local Plan or similar statutory planning framework, then perhaps a conditional contract with a fixed price would suffice. On the other hand, for land without such an allocation, and with no

guarantee of future success, this will not be appropriate. This article looks at such a situation.
Historically, the Option Agreement has been the go-to solution. Put simply, the landowner grants a developer the option to buy the land at its then current market value when planning permission for development has been granted. The developer is placed under an obligation to do all it can to obtain planning permission for, say, residential development, or for mixed use development. The Option Agreement would also contain the following provisions:

1. The length of the Option Period – usually governed by how difficult it will be to obtain planning permission;
2. Complicated valuation provisions, normally designed to give the developer an advantage;
3. A discount against the market value that the developer will be entitled to for its efforts;
4. A claw-back of the costs incurred in the promotion, such as planning consultants’ fees and the cost of specialist reports such as ecology and highways; and
5. Dispute resolution provisions in the event that the landowner and the developer do not agree the price.

Option Agreements can work well, but a disadvantage is that there is only one person in the market to buy the land: the developer. The negotiations on price are therefore set against the background of a notional market, and not the actual market. Landowners can feel cornered and their only alternative to capitulating is to go to an arbitrator or expert to resolve the dispute, which costs money, causes delay and is of uncertain outcome.

An alternative, which has gained prominence recently, is the Promotion Agreement. It has many of the same features as the Option Agreement, but with the important difference that the promoter does not buy the land. Instead, when planning permission has been granted, the landowner and the promoter get together and create a marketing strategy. Typically, this would involve agreeing:
The means of disposal – such as private treaty, public tender or auction;
Whether to dispose of the land as a whole, or in tranches;
The asking price; and
Whether to include an uplift provision in the sale terms.

The advantage of this scenario is that the landowner is involved in the overall process of the sale, and has the comfort of seeing the land fully exposed to the market, to achieve the best possible price. The process is transparent, and the landowner has a degree of control at all stages. This is of particular interest since the onset of the banking crisis, as landowners want to see the actual value of their land, not a value produced by reference to the Red Book – the RICS Valuation Standards Handbook.
Clearly, these different types of Agreement bring different types of parties to the table. A developer is unlikely to enter into a Promotion Agreement as it would not be able to ensure that it had the ability to buy the land. It would have to compete in the market and pay the best price. On that basis it would prefer to enter into an Option Agreement. There are specialist companies around who deal in Promotion Agreements. They have no desire to buy the land themselves, and make their money by taking a percentage of the sale price of the land. It is in their interests to maximize the sale price so as to maximize their profit.
There are two points which Options and Promotion Agreements share, and which are often overlooked:
It is essential in both cases to put a cap on the amount of Promotional Costs that the developer or promoter can recover. These costs can mount up, and erode the landowner’s profits unless they are kept in check; and
It can be desirable to put minimum land values or sale prices in the agreements. Specialist legal advice is needed in dealing with strategic land. However, advice from a specialist land agent or surveyor is also essential when agreeing Heads of Terms for the promotion or sale of strategic land.
Mistakes can be expensive in this field of the law. At Beaufort Montague Harris Solicitors we can advise on these and related issues, such as landowners’ consortium agreements, and uplift or overage clauses.

Commercial Leases

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A commercial lease can be an asset – but it can also be a very expensive liability. Taking great care before agreeing terms or signing on the dotted line is therefore vital, as once terms have been agreed it is virtually impossible to change them. Here are some of the key considerations:

  • Ask for an initial rent-free period, especially if you will be fitting out the premises at your expense.
  • Think about whether you need a break clause in the lease, particularly if you are starting a new business or plan to expand during the lease term.
  • Look into limiting your repairing obligations, as full repairing and insuring leases can be extremely onerous.
  • Commission a survey of the property to establish your potential liability for repairs. It is a false economy if you do not.
  • In the case of a new building, it’s essential to exclude liability for inherent defects in the construction.
  • Find out if a service charge is payable under the lease. If so, look at the last three years’ service charge accounts.
  • Take advice before agreeing to a rent deposit or a guarantee.
  • Check whether you have security of tenure.
  • If the lease is to be a long one, make sure that rent review intervals are reasonable.
  • Check whether Stamp Duty Land Tax is payable on the transaction and if the lease needs to be registered at the Land Registry.
  • Finally, make sure that you don’t agree to pay the landlord’s professional fees.

We can assist with the review of proposed terms and conditions, or if you require specialist advice or negotiations.