Developers will often agree to buy land subject to the grant of a satisfactory planning permission. The contract will need to define what constitutes a satisfactory planning permission. Here at Owen White we have developed an innovative way of dealing with this.
Conditions and Obligation
When planning permission is granted the local planning authority will add a number of conditions and obligations. These can range from a requirement to get the colour of the bricks approved, to an obligation to build a new school or to provide affordable housing.
Unfortunately there isn’t a standard list of conditions and obligations that can be imposed. Local planning authorities often impose conditions or obligations that no one was expecting.
The purchaser will want as much flexibility as possible to decide whether or not the planning permission is satisfactory, which will determine whether it has to buy the land. The seller will want to give the purchaser as little ‘wriggle room’ as possible, to avoid losing the sale.
The Traditional Approach – ‘Onerous Conditions’
Traditionally, contracts have defined a satisfactory planning permission as a planning permission that is free of “onerous conditions”. The parties have to try and agree a list of conditions and obligations that would count as “onerous conditions”.
This would be easy if there was a fixed list of conditions and obligations that can be imposed but, as mentioned above, this is not the case.
The parties often struggle to work out how to guard against the risk of unexpected conditions or obligations. For example, some contracts will refer to conditions or obligations that are “unreasonable in the circumstances”. This creates uncertainty, as this is very vague.
The Owen White Approach
Owen White adopt a different approach. We take the view that the majority of developers are buying land in order to make a profit. Their real concern is likely to be the effect on profit that a planning condition or obligation will have.
Our contracts include a list of planning conditions and obligations that the parties were expecting, and which have been taken into account in agreeing the price. The purchaser will not be able to object to these conditions or obligations.
The contract provides that the purchaser will be able to object to conditions or obligations that are not on this list, if such conditions or obligations would affect the profits of a reasonable developer by more than a given amount. The amount concerned is agreed on a contract-by-contract basis.
The test is not whether the condition or obligation would affect the profits of the actual purchaser. The test is whether the condition or obligation would affect the profits of a hypothetical reasonable developer. It is therefore an objective test, which can be carried out by an independent expert if there is a disagreement. This also means that the purchaser need not disclose its financial appraisal.
This approach results in there being a scientific, objective test of whether unexpected planning conditions or obligations are unreasonable. It also allows the parties to agree that the purchaser will accept a certain amount of financial risk, with this risk being capped.
We have found that purchasers and sellers are quite happy to adopt this approach once it has been explained to them, as it provides certainty for both parties.
For more information on this subject or about buying or selling commercial property or land, please contact the Property Development team. For further information about planning applications please follow the links below: