The decline of subsidies, the rise of property development and the strength of an overage agreement
After many years of receiving direct farming subsidies from Europe, the Basic Payment Scheme is due to be phased out with the first reductions due in 2021. The plan is to have it completely phased out by 2028.
It is envisaged that farmers will be asked to sign up to a new replacement subsidy scheme that will see payments linked to innovation, wildlife protection and environmental improvements. The exact detail is a still a little hazy but it is clear the era of direct subsidies is coming to an end.
A significant proposal is that the replacement subsidies are expected to be released from the requirement to farm the land. This will enable farmers to look at alternative uses for any land that they own.
Does this mean we will see farms full of solar panels or wind turbines? Quite possibly. Alternatively some farmers may think “enough is enough”, which may result in land coming up for sale to the property development sector.
The property development sector
Bovis Homes recently reported that its year end pre-tax profit has risen by 47% to £168.1m and Taylor Wimpey has seen an increase of 18% to £810m. Even with the wider uncertainty of various political and economic factors, Taylor Wimpey’s Chief Exec has reported “a positive start to 2019 and is encouraged to see continued strong demand…”.
With this strong developer demand for land, if you are a farmer you may well have developers knocking on your door to try and tempt you with their cheque book.
Let’s assume, for the purposes of this article, that you agree to sell your land for its market value to a developer who obtains planning consent to build 50 houses. Great, you may think, cheers to a happy retirement! The developer then pays the money agreed and the land is his. However, the next day a new application is submitted for 100 houses which, in crude terms, doubles the value of the land. This would leave you with a very bitter taste.
So, what can you do to retain a future interest?
You may have heard the term “overage”. This is the legal term for retaining some hope value. Should, therefore, the developer increase the value of the site within a certain time period you could go back and take a slice of the cake.
Overages are not straight forward to deal with and are likely be resisted by developers because of the added complications. However if you are a landowner you need to consider your options and protect the future value of your land.
If you are the developer then you also need to be prepared to discuss these points. The argument “we’ll never change the planning so this is unnecessary” will soon be shot down with “well you won’t mind an overage then!” If you have given this some forethought then you will know where your margins are and be prepared to negotiate. Obviously if an overage is not mentioned then you can simply keep quiet and hope that it never arises.
What is included in an overage agreement?
Overage agreements take many forms and there is no “one size fits all” but in essence there are a few main principles that you must consider:
- How much?
Will this be a fixed sum, percentage or variable amount? Who will calculate what is payable if it is variable and on what figure would the percentage be based? Who would step in should there be a disagreement?
- When?
What will trigger payment? Sometimes this is the obtaining of planning permission, the implementing of planning permission, or the sale of the land. If you are a landowner then the sooner the better, but if you are a developer you would want to defer this as long as possible.
- How long?
How long will the obligation exist? Five, ten, 15 years? There is no “standard” here so it’s all a matter of negotiation.
From the developer’s angle you also need to bear in mind the opinion of any mortgage lender. Chances are their mortgage powers will be subject to the terms of the overage so they will want some input also.
In summary
There is a lot to consider. If you are a landowner you need to consider these points and give this some real thought before agreeing a deal with a developer. You should take some advice at an early stage. If you are actively promoting your land then it is advisable to set out your requirements during the marketing stages.
If you are a developer then you probably want to keep quiet on these points but have done your homework should the issue arise. Again, if in doubt, consult your advisors at an early stage before agreeing terms.
If you need advice regarding an overage agreement then contact me directly via tony.dupreez@GAsolicitors.com or call 01752 203500.
Tony Dupreez, partner and commercial property solicitor