With land buying firmly back on the agenda for housebuilders, Michael Finnett, solicitor and residential property expert at law firm Gordons LLP, looks at some of the current issues that housebuilders must be aware of when purchasing land – and what steps they can take to protect themselves.
There is no doubt about it, housebuilders and developers are back in the market for land. Boosted by the success of Help to Buy and the continued recovery of the property market, housebuilders and developers of all sizes are actively looking for viable development sites across the UK.
The challenge, of course, is not just in sourcing land, but in sourcing land that can be brought through to development as smoothly as possible. It goes without saying that minimising the cost and time to secure planning and build out the development is key to maximising the financial returns. But with evident land shortages and an increased competition for viable sites, housebuilders and developers need to be ever-vigilant of potential problems.
Below are three issues that all housebuilders and developers should be aware of – and what can be done to mitigate the risks.
1. Mines and minerals
If a third party owns mines and minerals under the surface of land, it is important to establish exactly who owns such rights, and what rights exist in relation to those mines and minerals. It can often be difficult to find out who owns such rights, but any such potential rights should be investigated thoroughly (and promptly) to avoid any unnecessary delays in either purchasing the land, or its subsequent development.
Where mines and minerals are owned by a third party, and a housebuilder commences development by laying foundations, they may find themselves liable to a claim of trespass on the mines and minerals – even if mining/extraction of those mines and minerals may not be physically possible and/or economically viable.
A claim for trespass may lead to damages being awarded to the owner of the mines and minerals, or worse still, the housebuilder may find themselves subject to an injunction to prevent further development until a settlement is reached between the parties.
In many cases, the risk can be mitigated by obtaining an indemnity insurance policy. This gives the housebuilder financial protection against any potential challenges, and also provides continuing protection for the eventual plot purchasers once the site has been developed. The housebuilder must ensure they do not contact or approach the mines and minerals owner at any time, however, as insurers are unlikely to offer insurance where the owner has been put on notice as to any impending development/trespass.
This is a worst case scenario, of course, but it highlights the need to deal with any potential rights to mines and minerals as soon as possible.
Similar consideration must also be given to historic sporting rights affecting land, although it may be that an argument can be made that such rights have been abandoned if not been exercised for many years, or that such acts are now illegal in any event (and therefore no loss is actually suffered).
2. Restrictive covenants
Restrictive covenants are often imposed to protect land from development, or from being used for a particular use. It is imperative to ensure that there are no restrictions affecting land which would interfere with or prevent the development of land for the intended use. Whilst restrictive covenants should be easily identifiable from a review of the title deeds to the land in question, they can have serious implications if not correctly interpreted.
It must be noted, however, that even where there are restrictive covenants identified, it may be that those covenants are no longer enforceable. Where the covenants do remain enforceable, there are a number of options available to deal with this risk:
Indemnity insurance can insure against the risk of enforcement against the housebuilder (and subsequent plot purchasers, subject to the policy terms) by the party who has the benefit of the covenant.
Alternatively, the release of a covenant can be agreed with the party who has the benefit of the restrictive covenant. Bear in mind that approaching a party who has the benefit of the covenant is likely to preclude indemnity insurance being obtained if agreement cannot be reached between the parties.
Finally, an application can be made to the Lands Tribunal to either modify or discharge a restrictive covenant (subject to certain criteria being met) on specific grounds, including where the covenant is obsolete or the restriction prevents reasonable use of the land (and monetary compensation can be given for the loss of covenant).
3. Agricultural tenants
Another issue that housebuilders must determine as soon as possible is whether the land being purchased is occupied by a third party (i.e. not the seller), and if so, on what basis that third party is entitled to occupy the land.
Careful consideration must be given to how a third party occupies the land, and in particular, where a third party occupier may have an agricultural tenancy.
There are two types of agricultural tenancies – a “1986 Act tenancy” (being those agreed before 01 September 1995) and a “Farm Business Tenancy” (being those agreed after 01 September 1995).
A 1986 Act tenancy is governed by the Agricultural Holdings Act 1986, and provides agricultural tenants with not only a strong security of tenure (being the right of a tenant to remain in occupation once a tenancy or lease has expired), but also the right to pass on the tenancy to future generations (up to two successions) if created before 12 July 1984. The difficulty with a 1986 Act tenancy is that it is almost impossible to regain possession quickly, and landowners can often find that they have no alternative but to try and “buy off” the agricultural tenant to regain possession quickly.
Governed by the Agricultural Tenancies Act 1995, a Farm Business Tenancy is considered much more flexible. Most importantly, a Farm Business Tenancy can be terminated by a landowner on not less than 12 months’ notice (although a landowner should always consult a solicitor to determine exactly what the notice requirements are for each particular tenancy). The notice must, however, end on the anniversary of the commencement date if a periodic tenancy or on the last day of the term if a fixed term tenancy. It is therefore imperative that advice is sought as to when notice should be served as early as possible to avoid any unnecessary delays.
Advice should also be taken in respect of any compensation that may be payable to an agricultural tenant, whether a 1986 Act tenancy, or Farm Business Tenancy.