Land value capture – uncertain times

Tina Webster offers an update on what impact two major recent reports could have on the price of purchasing land for development. There is increasing political interest in capturing more of the increase in value resulting from planning permission. The recent Housing, Communities and Local Government Committee (HCLGC) report on land value capture made several recommendations that will impact primarily on landowners, but developers should not ignore the proposed reforms. In addition, while the focus of Sir Oliver Letwin’s independent review of build out (final report published at the end of October) is on build-out rates, it also proposes new statutory powers to purchase land. Land agreements must be flexible enough to accommodate all these likely reforms. The recommendations in the HCLGC report include a number of proposals that will reduce land value, including the introduction of local and strategic infrastructure tariffs. Developers will need to be alert to these charges if they are purchasing properties at fixed prices, as overpaying for land will never be a justification in viability arguments for reducing these planning liabilities. Compulsory purchase The more interesting area for developers is the suggested reform to compulsory purchase legislation, including changes to: the process, to make the procedure swifter, less expensive and less risky; and compensation payable. Planning authorities have powers under section 226 of the Town and Country Planning Act 1990 to acquire land compulsorily for planning purposes. These powers are rarely used, because of the complexities and risks involved. The HCLGC report recognises that a compulsory purchase order (CPO) could be used to facilitate land assembly or infrastructure provision in a multi-developer scheme. This may be particularly relevant where there is no legal relationship between the parties or if one party has a ransom position. Making CPO procedures simpler may encourage planning authorities to use them more regularly to ensure delivery of larger developments. Developers must be alert to the risks and opportunities which CPO may bring to land assembly. Hope value The HCLGC report argues that amendment to the assessment of compensation payable under the Land Compensation Act 1961 is required. There appears to be a growing political view that paying hope value results in an unequal distribution of value and favours owners. This report does not recommend linking value to a multiple of existing use value, which has been suggested elsewhere, but recommends acquisition at “a fairer price”. Clearly landowners will be concerned by these proposals, but how could they affect developers? Ultimately limiting the compensation which an owner receives following a CPO will result in a lower land value, but valuations under an option agreement will need to reflect the likely CPO value rather than normal open market assumptions. It should be noted that CPO compensation can take time to determine and may be established years after the site is acquired. This can be difficult for developers if they commit to purchase before compensation is determined. The Letwin report This report focuses on large sites (initially those of more than 1,500 units) and looks at ways of increasing build-out rates and measures which will increase variety. One of the proposals is to give planning authorities powers to create development vehicles and purchase large sites compulsorily at prices which are much less than full development land value. The report refers to values at around 10 times their existing use value. While initially these proposals would apply only to large sites, developers acquiring land that could form part of a large development will need to consider the risk of a statutory process imposing a different structure. This structure is unlikely to be consistent with the purchase agreement signed up with an owner. How should developers respond? Option and promotion agreements are widely used for the promotion and sale of land but these are not designed for a CPO situation. Developers will have to refine the terms on which they acquire or promote land to ensure that they retain control and have sufficient interest to achieve some return on their investment. Where a developer has an agreement but does not own the land, the following points should be considered: The developer should look to secure an interest in the property which must be acquired under the CPO. If a promoter has only a contractual relationship with the owner, the rights of a promoter can be lost on a CPO of the land. The planning authority will be looking to negotiate the land assembly rather than relying on a CPO. The developer must be able to enter into a collaboration arrangement to satisfy the authority and require the owner to join. If the planning authority looks to appoint a master developer, the developer needs the right to bid for this role with consequential changes to the terms of sale. The developer needs to be in a position to enter into some form of settlement agreement with the planning authority that will bind the owner. The developer will want fair compensation for its investment in promoting the site should the land be acquired compulsorily. This may include part of the compensation paid to the owner being paid to the developer or the developer being given a phase of the development site. The developer may need to be involved in the negotiation of the compensation payable following the CPO. The developer may want the ability to ask a planning authority to promote a CPO to acquire land in a ransom situation. Be flexible It is very clear that the government is looking at reform, but at the moment it is not clear what legislative or policy reforms will follow. In this uncertain climate, developers must retain flexibility and ensure that acquisition, promotion and development agreements can accommodate the introduction of additional land value capture measures as well as likely changes to the CPO process. Main image © Photofusion/Rex/Shutterstock Tina Webster is a partner at Irwin Mitchell LLP Read the full Land Value Capture report at: https://publications.parliament.uk/pa/cm201719/cmselect/cmcomloc/766/766.pdf Read the Letwin report at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752124/Letwin_review_web_version.pdf