James Cheshire, Associate Solicitor at Taylor Walton Solicitors, discusses unlocking site potential with bespoke legal agreements.
It’s not uncommon for developers and builders to have issues with cash flow and a recent example of commercial and legal creativity has helped an option agreement transaction over the line, so that both the land-owning developer and the acquiring developer achieved the outcome they needed.
Where a developer owns a number of sites, but doesn’t have the cash to build them all out, finding someone else to swiftly purchase a site can free up much needed cash. The downside to this arrangement is that it often doesn’t help improve cash flow quickly as there may be planning delays, or delays relating to a buyer’s funding, which can have the knock-on effect of holding up the ultimate sale of the land.
In an example which I dealt with recently the landowner – who was also a medium-sized developer – needed to offload a site reasonably quickly to free up working capital to progress other sites they were already working on and were in danger of stalling. The purchaser acquiring the land, with the benefit of planning permission, was also a developer, but they crucially had a large amount of cash funds available and were looking for their next site to invest in.
The parties agreed that, at the same time as exchanging an option agreement, the purchaser would loan to the landowner a seven-figure sum, roughly 40% of the purchase price in addition to paying an option fee. Both of these amounts will be deducted from the final purchase price for the land, assuming the loan is not repaid before then. Paying the loan upfront, along with the option fee, has provided a huge financial boost to the landowner, so they can finish other projects.
With this transaction, as well as there being an option agreement to negotiate, there was also a loan agreement, a legal charge over the property and a personal guarantee from a company director, all with an element of risk.
There are certainly pros and cons to this type of deal but if it means that you can progress with your target site then there are ways to protect your investment. If, for some reason the purchaser changes their mind on the site, the loan will be repaid to the purchaser by the landowner as per the terms of the loan agreement. The loan is protected by a legal charge over the property and a personal guarantee from a company director as the funds were paid to the landowner company.
In this particular matter the purchaser’s legal charge would rank second in priority to a first legal charge in favour of a third-party lender, hence the need for further security via the company director’s personal guarantee
Whilst some land and property transactions can seem fraught with issues which cause delays, considering a bespoke and structured arrangement, such as in this case, can be the key to unlocking potential and striking a deal to satisfy both parties. It is worth asking the question to find out what practical and legal solutions we can advise to progress your transactions.
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