Last week, we looked at the support a landowner may need to work up and progress a planning application for their proposed industrial/logistics estate:
- the role of a promoter or developer in managing the wider consultancy team;
- the benefits of masterplanning; and
- the need for a flexible outline planning permission and section 106 agreement.
This week it’s all about strategies. We consider different approaches to delivering the development, disposals, and reserved matters approvals.
Infrastructure
The delivery and long-term maintenance of the estate infrastructure and common areas (roads, services, watercourses, landscaping etc) needs careful (and early) thought.
The approach to maintenance might, in fact, drive the decision on delivery. If delivery is too early, the landowner may incur irrecoverable maintenance costs until someone else is there to pay them. Ideally, infrastructure would only be delivered at the same time as the areas of the estate that need it.
For instance, the section 106 agreement might require items of infrastructure to be delivered either before any plot on the estate is occupied, or by milestones throughout the development. This could be off-site highway works and/or any infrastructure to be adopted by a public authority, so the landowner needs to decide, early on in the masterplanning process, whether it wants onsite infrastructure to be adopted (if the local authority will accept it, which increasingly they won’t) or to remain private.
One clear benefit of adoption is that the landowner doesn’t need to repair and maintain adopted infrastructure. However, it does also lose control and flexibility it might want for redevelopment or sustainability improvements; privately owned infrastructure can more easily be relocated and upgraded.
In contrast, keeping infrastructure private will mean setting up an estate-wide service charge (which we will consider in more detail next week) and then operating it.
Common areas
A landowner who intends to retain the whole estate as a single investment will probably retain the common areas itself and appoint managing agents to maintain them and operate a service charge, but where the intention is to sell each plot the landowner won’t want a residual commitment.
Plot purchasers are unlikely to want to own and manage the infrastructure themselves and charge their neighbours for maintenance costs, so the normal solution is for a management company to hold and maintain common areas. Handover generally happens once the final plot on the estate has been sold, with the landowner (or its development partner) managing the common areas and operating the service charge until then.
Development
The landowner’s long-term intentions will influence delivery of the development. A landowner planning to retain the completed estate as an investment:
- will usually seek to agree prelets on a “build-to-suit” basis, with occupiers taking rack-rented leases;
- may undertake speculative development in favourable market conditions;
- will deliver all the infrastructure itself, as and when needed for each plot; and
- will operate an estate service charge through the occupational leases.
Other landowners will sell to realise value. The quickest exit is a sale of everything with the benefit of the outline planning permission, for someone else to build out.
Better returns can be generated (with greater risk) by selling “oven-ready” serviced plots, for development by either the purchaser or the landowner/developer. The right promoter/developer should (subject to market conditions) be able to source prelets to enhance the investment offer, and some purchasers may be willing to undertake speculative development, but either way this approach will require the landowner and its development partner to deliver some estate-wide infrastructure upfront to facilitate the disposal and development of each plot.
Some landowners will want to curate the estate carefully, especially if their name or brand will be associated with it or they have legacy aspirations. They could take on the role of “master developer”, managing the delivery of all the common areas and infrastructure and phasing the development over several years, seeking the right mix of buildings and occupiers while maintaining high delivery standards. This approach is more common on large residential developments and retail schemes, but is sometimes seen on logistics/industrial estates. Most landowners won’t go that far, though, and will simply focus on delivering serviced plots to meet market demand.
Disposals
Selling landowners need to be clear what are they offering to, and seeking from, the market. The advice of good marketing and sales agents will add value here, while the identity of the landowner and its long-term aspirations will influence the decisions.
Freehold transfers are appropriate for a landowner with no long-term aspirations, who is selling to exit and willing to leave the plot owners (via any management company) to enforce matters between themselves. Each purchaser of a freehold plot will need to covenant with any management company to pay the estate service charge, and with other plot owners to comply with covenants securing estate-wide interests. This is usually secured by a restriction on the plot’s registered title requiring a deed of covenant on purchase.
Long leases
If the landowner wants to control the estate over the long-term, whether for legacy purposes or simply to get the land back in time (many Oxbridge colleges, ecclesiastical bodies, family trusts and landed estates are willing to wait a few hundred years!), a long lease could be attractive. Although a diminishing asset, the general consensus seems to be that, if a lease is long enough, there is no valuation discount when it is granted against a freehold.
Another potential advantage of granting a lease is that the Landlord and Tenant (Covenants) Act 1995 means that landlord and tenant covenants will be directly enforceable against each new landlord/tenant following any assignment or transfer of the freehold without needing any deed of covenant. Chains of covenants, especially indemnity covenants, are common on freehold titles but can create problems for the original contracting parties when it comes to enforcement against the current freeholder.
However, only covenants between the landlord and tenant are directly enforceable; where a management company maintains estate common areas but is not also the landlord, each new tenant will need to covenant with it to pay the service charge.
Leases can also be a good vehicle for enforcing other covenants, especially when backed up with a forfeiture clause. Although the courts are generally reluctant to allow forfeiture of long leases, if the tenant is in breach of a covenant that addresses a material concern a court might only award relief from forfeiture if the breach is remedied.
Planning
The developer will usually:
- advise on planning strategy;
- prepare each planning application; and
- run the planning process.
The landowner, the intended occupier and any prospective purchaser (eg forward-funder) will want to approve the application before it is submitted, any draft conditions, and any draft section 106 agreement, and also any statutory agreement that might be required for infrastructure (eg highways or utilities agreements).
Disposals are usually conditional on the grant of an acceptable reserved matters approval that gets safely through any judicial review challenges.
Where the landowner and developer will not be delivering anything themselves (for instance, where a plot is purchased by someone to develop itself), the disposal could be unconditional. Any subsequent planning process would probably then be run by the purchaser.
Section 73 applications
Sometimes a detail or condition in the outline permission can become problematic, even if originally thought to be workable. For instance:
- it might not fit with an intended occupier’s requirements; or
- circumstances might render it impossible to discharge.
If a “non-material amendment” under section 96A of the Town and Country Planning Act 1990 cannot be made, an application can be made under section 73 for a new outline permission without that detail or condition. Either a new section 106 agreement, or a variation of the existing one to bind it to the new consent, will be required, and might have to be signed by other plot owners (if plots have been sold in the interim) as well as by the landowner. Leases and freehold transfers should, where there are conditions that might necessitate a section 73 application, anticipate this. Section 73 cannot be used to change the description of the development, or materially change the nature of the scheme, so keeping the description of development as loose as possible is wise. The approval of matters reserved under the outline permission shouldn’t involve other plot owners.
Conclusion
Each landowner will have a different view on the choice between a quick exit with little risk, and a potentially greater return (but a lot more to think about!) for taking on development risk. The contract with its development partner should reflect their approach, and provide for the appropriate strategies to be worked up and implemented.
Next week we will look at some of the things a purchaser will consider:
- the management company and service charge arrangements;
- alternatives to a management company; and
- the covenants that could be included in a freehold transfer or long lease.
Simon Keen is a partner in the commercial property team and Tom Newcombe is a partner and head of planning and environmental at Birketts LLP
