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A developer has offered to build me an amazing new house on my land – what should I consider?

A developer has offered to build me an amazing new house on my land – what should I consider?

Developers often seek out the owners of old large houses with big gardens and then offer to build a new house on part of it for the owner in return for building and selling off a new house (or houses) on the other part.  It can be a great way to get a modern energy-efficient and stylish new home in place of an older rambling property, without having to find a big lump of capital.  There are many considerations to factor in when a landowner is doing this, some of which are detailed below:

The Development Agreement

  • It is likely that a developer will not want to acquire land from a landowner because they will have to pay Stamp Duty Land Tax on it, if they do. The parties are likely to proceed by entering into a development agreement, but there are various ways to structure these deals.
  • Under a development agreement, the developer will have access to the land to build upon it, but ownership of the land remains with the landowner until a sale-off occurs.
  • The development agreement will need to contain detailed specifications of what the developer is going to build. It will usually provide a great deal of control to the developer about the sales and marketing process – which is their expertise, so that is fair enough. A landowner would normally be protected by setting a “minimum price” below which a sale cannot take place and/or a minimum profit to make the deal worth their while.
  • The development agreement will contain certain conditions, such as that the newly built dwelling needs to have been constructed to practical completion before a sale-off can occur. This ensures that a landowner will get its new house properly built and finished.
  • Another important consideration is the timescales within which the project is to be concluded. There should be a relevant “target date” and “long stop date”. A landowner may want the right to step in to finish off the project if the developer has gone bust not concluded within a suitably generous period of time.

Legal Considerations

  • An existing mortgagee will need to consent or (more likely) be paid off. These deals are much easier where the landowner is in the happy place of owning its land free of mortgage.
  • The developer is likely to put a charge and restriction over the land to ensure that the landowner does not sell to a third party while the construction is being carried out.
  • If the newly built property is separately accessed from the public highway, a s.106 Planning Agreement and/or a s.278 Highways Act Agreement will need to be entered into, to which the landowner will need to be a party.

General Considerations

  • There will be a period after the existing house has been knocked down when the site is worth materially less than it currently is. There is therefore a degree of commercial risk if the developer was to fail at that stage before it starts adding value to the site. A logical remedy in this situation would be to get personal guarantees from the developer’s directors, if they are available, which would give a landowner some additional comfort – or choose a big enough developer with a strong track record and accounts.
  • It is worth a landowner requesting references from projects that the developer has already carried out, as to the way to prove how the developer conducts themselves and the quality of what they build.
  • All the time that the developer is building the houses they are doing so at their own cost from their own resources. It is fair that they make a profit at the end of the day.
  • A landowner will want some input into the design of the development and therefore the terms on which planning permission is applied for and obtained. The nature of that planning permission is of equal interest to both the landowner and the developer, to ensure that the amenity of the landowner’s new house is preserved, and the value of the property is maximised and so the profits to distribute (if they are to be shared) are as good as can be achieved.
  • The landowner should consider with the developer whether the developer engages its own builders from its own staff to do the work, or does it sub-contract the work to particular contractors and sub-contractors. If subcontractors are used, the landowner should consider the good-standing of those companies and the quality of their work. The landowner should take references for these companies too.
  • Engaging an experienced surveyor or property consultant to thrash out the commercial terms is a very good idea.

Financial and Tax Considerations

  • One of the biggest issues will be how the landowner deals with the existing mortgage and its redemption.
  • A landowner’s bank is unlikely to be happy with the existing dwelling house being demolished (unless you speak with them and they confirm that they are) as the bare land value may not be enough security to cover the debt. If the developer provides funds to pay off that mortgage they are likely to want to get that money back in some way in the final profit calculation.
  • Equally, if the developer is meeting rent payments (as the landowner needs to live somewhere during the project) they will want that taken into account in the profit account, which may include some level of “interest” as well as the cost of the rent itself.
  • A landowner will need to consider the tax treatment of the sale of the house, particularly in relation to capital gains tax and whether the principal dwelling house exemption would apply.
  • A landowner may also want to consider setting a fixed figure for “liquidated damages” in the event that the developer does not complete construction of the new development to the agreed target dates.