Posted by Richard Howes, Senior Associate
Senior Associate Richard Howes from our London Real Estate team looks at some of the key terms of conditional contracts from a development perspective:
In a property context, a conditional contract is a contract to purchase land, which is conditional on some thing or things happening before the purchase can complete. When that thing does happen, the condition is satisfied and the rest of the contract kicks in and may be completed.
The condition can be any number of things, such as a satisfactory environmental survey, or a gas connection being made to a property, but the overwhelming majority of conditional contracts are seen in the context of development, with the main condition being the grant of a satisfactory planning permission, allowing the developer’s intended development to go ahead.
It gives both parties a degree of certainty that once the condition is satisfied (which at the time of the contract is uncertain), the sale will go through on pre-agreed terms.
Conditional contracts occur in both freehold and leasehold property transactions; in the case of the latter, they would be called conditional agreements for lease.
Some Key Terms:
- Certain clauses are immediately binding on the exchange of contracts (such as confidentiality, the obligation to apply for planning permission and certain boiler plate clauses), while others only bind once the condition or conditions have been satisfied and the contract becomes ‘unconditional’ (most obviously and fundamentally, the obligation to complete the purchase).
- Where planning permission is a condition, the buyer’s obligation to apply for planning permission will be immediately binding and the contract will provide a timeframe for that. It will also usually set out the extent of the seller’s involvement and cooperation in the planning process, as well as precluding the seller from objecting to the planning application or submitting a competing application. There will generally be extensions to the timeframe, for example regarding such things as appeals and judicial review (now a 6 week period).
- The buyer will want control over what a satisfactory planning permission is, so that once one is granted and it is obliged to complete the purchase, it will be able to carry out its development profitably. If the seller will not accept a catch all definition which only requires the planning permission to be satisfactory in all respects to the buyer, then provisions for unacceptable conditions will have to be imposed and parameters put around them in terms of developer costs, which would otherwise make the development unprofitable. Examples of unacceptable conditions attached to a planning permission from the buyer’s point of view might be an excessive number of affordable units and other contributions, and the requirement to make s.106 and CIL payments above a certain threshold. In the case of dispute, the parties might want a clause referring things to independent expert determination of matters. This is usually someone (such as a RICS surveyor) working in the field with upward of 10 years’ post-qualification experience. There will generally be a provision allowing the buyer to waive all or some of the conditions, if it wishes, once a planning permission has been granted. There may also be an obligation on the buyer to appeal a decision where the planning consent is not granted. This will usually be with reference to planning counsel’s opinion as to the percentage likelihood of success of a consent being given on appeal (usually requiring a greater than 60% chance of success, in counsel’s opinion, which is usually that of a barrister of more than 10 years’ call, specialising in planning law).
- It is always prudent to have a long stop date in the contract. This can be a hard and fast date a year or two (or more) in the future, or one that is pushed out by determination of appeals, third party applications and judicial review. If the long stop date is reached without a satisfactory planning permission being granted, the contract comes to an end. Consider what happens to the deposit if the condition is not satisfied and the purchase does not complete: will the seller be entitled to keep the deposit, as non-refundable consideration for having its land tied up for the duration of the contract, or will the deposit be returnable to the buyer? Like most things, it will come down to a question of bargaining power between the parties.
- Once the condition is satisfied, there will be an obligation on the buyer to buy and on the seller to sell at the purchase price. This may be a pre-determined fixed price or the higher of a base price (which may be RPI or other index linked given the time elapsed since entry into the contract) and a price to be calculated with reference to the market value of the land on the grant of the planning permission. This could be a percentage of the developable value per acre of developable land. Any dispute would usually be catered for by a clause allowing for reference to a RICS valuer’s determination.
- There should be a provision allowing the buyer to have access to the land between exchange and completion, in order to conduct surveys etc. Further parameters could be imposed as a result of surveys. For example, if an environmental survey has not been concluded prior to exchange of contracts, it may be a condition that the environmental survey must not result in a remediation cost above a certain threshold. If it does, it might be that the buyer can pull out of the contract or some of the cost of remediation is shared with the seller. Separately, there would ordinarily be a provision for compensation to the seller for damage to the land and crops, as a result of access and surveys.
- Vacant possession (VP) will normally be granted on completion. The contract may specifically provide for timely notice to be served on any tenants, farmers, and those with grazing licences, currently using the land, so that vacant possession can be granted by completion. VP may be a further condition of the contract.
- There will need to be a clear completion date. The parties should consider how much time may be required by either party between exchange and completion to deal with various matters, including funding issues by the buyer, notices to vacate to secure vacant possession by the seller, etc., and then set the completion date accordingly.
- To save time and angst later on, it is usually better to agree and append the form of transfer to the contract before exchange. The transfer may contain overage provisions relating to the value of sales or further development or change of use of the land in the future; or these things can be dealt with in a separate overage deed. The transfer should also reserve and grant any necessary rights over adjoining land, if the transaction is a sale of part.
- Option Agreements, Joint Ventures and Promotion Agreements represent variations on this theme and can be used to fit particular circumstances while addressing similar issues dealt with in Conditional Contracts.
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