The government’s current housing target is 300,000 new homes per year and its current policy is to increase housing land supply to meet the shortfall in housing to reach this, write Tina Webster and Samuel Knight.
Responding to this need, planning authorities are looking at a range of delivery mechanisms, one of which includes garden villages. In December 2017, the then housing minister, Alok Sharma, said the government was supporting “24 locally led garden cities, towns and villages”. However, bringing together large developments of this nature is complex. One of the main difficulties with these sites is land assembly.
Land assembly
Sites identified for larger schemes are often owned by several landowners. Masterplanning has to be driven by good design and should not be constrained by land ownerships. The masterplan will incorporate a range of land uses, including major infrastructure and employment space, which is needed to sustain new communities. The delivery of these schemes takes many years and the drawdown of land for development has to be phased. This brings with it a number of problems:
■ The value of different parts of the site may range from high-value open-market housing areas to land zoned for open space or infrastructure;
■ The release of land will be phased over many years which allows those owning the early phases to realise value years before those with later phases;
■ The early phases may be supporting heavy infrastructure requirements which depresses value;
■ While the land may be delivered in phases, all of the land is needed for the delivery of a successful project; and
■ Phases of the development cannot be developed in isolation. The site-wide facilities need to be available for each phase.
The challenges this presents on land assembly are obvious. The need to “equalise” or spread value over the whole site is critical. Designing the development in a manner that averages value across ownerships will not work. Other mechanisms are needed.
Unless solutions are found to equalisation, large sites will not come forward. The government has recognised that this is an issue and in its 2017 white paper Fixing our Broken Housing Market reference is made to the possibility of improving local authorities’ role in land assembly through the use of “land pooling” (as used in Germany), which effectively equalises value.
Land equalisation
Equalisation tries to produce fairness between landowners either through the distribution of sale proceeds and/or compensating owners whose land is in the later phases.
There are always complications. If some of the property contributed to the site has a higher existing value, for example buildings, this may need to be reflected in the distribution mechanism.
Tax-driven solutions
The easiest way of equalising value would be for each owner to share sale proceeds of their land with the other owners. However, this can lead to double taxation if the receipts are chargeable to capital gains tax (CGT). The owner selling land will be liable to CGT on the whole of the sale proceeds despite having to pay part to the other owners. The other owners will also be taxed on the receipt of a share of the proceeds from land they do not own, with no acquisition cost to act as a base value for CGT calculation as they are not selling land.
Potential structures to achieve equalisation
a. Pooling trust
One solution is for the landowners to create a “pooling trust.” Their land is transferred into a bare trust and all the land is pooled. This arrangement is based on Jenkins v Brown [1989] STC 577, which accepted the principle of pooling trusts for these purposes.
These arrangements are often complex but can be an effective method of sharing value on the disposal of development land. They are not free from difficulty, particularly if the distribution of land receipts is not to follow the proportions of the original value of the land or if certain assets attract tax relief on sale.
A pooling trust should be approached with caution as there is a concern about stretching the principles established in Jenkins. The interaction with other taxes must also always be considered.
b. Cross options, restrictive covenants or other form of constraint
A different approach is to provide for the grant of cross-options between the landowners at agricultural value. When an owner wishes to sell the land the buyer must also make a payment to the other landowners in order to release their options over the land being sold.
The same principle can be used by using restrictive covenants where each landowner enters into a restrictive covenant in favour of the others preventing development, which has to be bought out on sale to a developer. Other forms of constraint or development charge which benefit the other owners can also be considered.
Once again, considerable care must be taken in setting up these structures as they can have unexpected tax consequences and can also be very difficult to unscramble if the sales do not proceed.
c. Option agreement direct with the developer
If a single developer is acquiring the whole development site the “equalisation” can be achieved by adjusting the purchase price payable to each owner.
Again this appears simple, but trying to determine all the possible scenarios at the outset is extremely difficult, particularly if market values shift during the period when the land is being bought in or if later phases are not acquired.
d. Consortium company/LLP
A consortium company or LLP can be created by the owners through which the land at the site is sold. Rather than transfer the land into these vehicles they are used as an intermediary through which land is sold. This vehicle will sit between the owners and the buyer, effectively redistributing sale value to achieve equalisation.
The structure usually involves the grant of options to the new corporate vehicle, which in turns grants an option to a developer. On exercise the land is sub-sold by the company or LLP to the developer.
These structures work well on a single sale of a development site but are more complex where the sales are phased with some phases only involving single ownerships.
A balancing act
Equalisation is never straightforward and involves balancing commercial considerations with tax consequences. Often the solution will involve a mixture of the above methods, as there is not a single structure which fits all situations.
It is interesting that the government is looking at greater use of compulsory purchase powers by local authorities to deliver housing sites and is also considering using the German model of land pooling to help address some of these issues. The government’s response to the housing white paper consultation published in March indicates that they are alive to the problems and are committed to helping local authorities come up with new approaches to the land assembly process. Perhaps statutory forms of land pooling will in time replace the current use of pooling trusts but in the meantime landowners will need to adopt complex mechanisms to achieve fairness for all on the sale of a large development site.
What is a pooling trust?
■ The owners give up ownership of specific parcels for a percentage of the whole site.
■ On the disposal of part of the land each owner is entitled to receive their proportion of the sale proceeds.
■ The legal title can remain in the names of the original owners or transferred to trustees of the trust.
■ The transfer into the pool should not be a CGT disposal.
■ The arrangements will allow each owner to continue to use and enjoy their original land and receive income.
■ The pooling trust can be reversed if the development never happens.
What is equalisation?
■ Equalisation is the mechanism by which a group of owners try to share overall sale proceeds in proportion to the area of their land.
■ Equalisation recognises that each acre of land is as important as any other acre of land at the site and should attract the same value.
■ Equalisation prevents the development being frustrated because one owner looks to ransom the others.
■ Equalisation reflects the fact that all landowners depend on each other.
■ Equalisation structures have to factor in phasing.
■ Equalisation tries to compensate owners with land in later phases who receive sale proceeds after owners with land in earlier phases.
Tina Webster is a partner and Samuel Knight is a solicitor in the real estate department at Irwin Mitchell LLP
