Why a conditional contract?

Why do we use conditional sale contracts? What does the buyer gain? What does the seller gain?

What does the buyer gain?

The buyer gains a great deal:

  • The buyer is given the first opportunity to get the planning permission.
  • The buyer will generally obtain considerable control over the process of the transaction and the potential development.
  • If the deal goes “pear-shaped”, the buyer can walk away having invested both time and money, (perhaps considerable sums if the planning application goes to appeal), but not the cost of buying the land.

What does the seller gain?

This is a much more difficult question because the conditional sale contract model means that the seller:

  • Loses control of the transaction.
  • Risks losing a lot of money.

Does this mean that the seller should not go down the route of the conditional sale contract?

The conditional sale contract may still be appropriate. There may be particular advantages in the buyer applying for planning permission. For example:

  • The buyer may have some particular expertise and may have obtained planning permission in similar circumstances several times before.
  • The buyer may have a particular working relationship with the local authority and may be able to trade another planning permission on a site, which is less attractive than this one.

Where the conditional sale contract is appropriate for the deal, there is much to be gained by the seller’s lawyer coming on board as soon as possible, and even before other advisers.

In this day and age of increasingly having fixed fees or capped fees and lawyers undercutting one another, the ultimate objective for a lawyer (apart from avoiding being sued for negligence) is being able to charge a premium fee. In my view, a lawyer can justify a premium fee if the lawyer can bring commerciality to the deal. The seller’s lawyer can bring real value, which ought to command a premium fee, if the seller’s lawyer is the real transaction manager. The Standard document is a valuable aid to that role.

Despite pressure from surveyors and buyers, it may be that a conditional sale contract is not the most appropriate way forward. It will be for the seller’s lawyers to identify this and alternative approaches.

 Other options for the seller

In a recent conversation I had with a property director of a substantial pub business, about the need to sell on properties that were underperforming as pubs, the question arose whether the conditional sale contract was a mechanism that was much used.In that operator’s view, the complexity of entering into a contract conditional on planning was not, in most cases, sufficiently attractive because there was little chance of a material increase in the resultant value. Out of a portfolio of 150 sales over the last two or three years, there had only been two sites where their disposal was conditional on planning. These were exceptionally more valuable than the average disposal figure, three times in one case, nine times in another.

In most cases, the alternative use for an existing property was well known and the chances of a particular planning application being refused or conditions imposed, which would have a material effect on the value, were very small. There was little to justify the developer entering into a conditional sale contract.

Before deciding what course of action to take, the seller and the seller’s advisers should run a “sanity check” on what is the best course of action.

Outright sale

It may be preferable for the seller to insist on an outright sale to the buyer and for the sale price to reflect the risks being taken on by the buyer.

Benefits for the seller

Greater certainty for the seller.

Disadvantages for the seller

  • The seller may lose out on a share of the value of the land as enhanced by the planning permission and subsequent development, unless complex overage provisions are incorporated into the contract
  • It may take the buyer a long time to exchange contracts because the buyer will generally be keen to carry out an investigation that is focused on the potential for getting the requisite planning permission and being able to carry out the development.

Seller goes it alone

Despite the government’s intentions, the latest changes in the planning legislation retain, at least for the moment, the concept of outline planning permission.

The seller may prefer to obtain outline planning permission and sell the property with the benefit of the outline planning permission. This effectively puts down a benchmark for a potential buyer as the minimum sort of development that can be obtained for that property.

This will require the seller to create its own team of advisers, planning consultants, surveyors, architects and others, as necessary, to put a scheme together, to seek an outline planning permission.

Any purchase of the property with the benefit of that outline permission will then be an outright, unconditional purchase without the risks and difficulties involved in a conditional sale contract.

Alternatively, the seller may go on to develop the land and to sell the land in its developed state.

In taking this approach, the seller bears the cost of fees in obtaining the outline planning permission, but the seller’s team can, ideally, achieve a real increase in the value for the land.

Benefits for the seller

  • The seller retains control of its own tax liabilities.
  • The seller may retain control over the effect of the planning development on perhaps adjoining land which the seller is retaining.
  • The seller is better able to back off if the seller sees things are going wrong, if the development is premature or if it may lead to consequences concerning environmental clean-up, and so on.

Disadvantages for the seller

  • The seller may not have the requisite expertise or interest in development, which may affect the seller’s ability to get planning permission in the first place.
  • The seller may not be able to finance the development.
  • The seller may require a more immediate financial return on the land.

Note from Practical Law Company