With land and property one of the few commodities which rarely decreases in value, both are highly attractive for individual and corporate investors, says Oliver Emmett from Tallents Solicitors. Despite recent interest rate rises, land and property remains a key area to invest and realise financial gains, particularly where land is purchased for its development potential. It is therefore key that any purchaser understands the basic steps associated with purchasing land or property for development.
Location, location, location is key
Arguably the most important consideration for an investor is the location of the site or property. Prime development land will command a high asking price, however on a post-development resale, the ‘kerb appeal’ of a property will normally offset any additional outlay at the start and could produce significant profit. This is particularly true for areas undergoing urban regeneration and gentrification, which often attract ‘hip’ independent businesses to invest as well. This mix of factors all serve to increase the desirability of an area, to which property prices often follow suit.
Funding the purchase of land or property for development
Next, any buyer should have a financial plan in place as to how they will fund the acquisition of the land, and the development project. Small scale development opportunities are normally funded by bridging finance, and this method of finance is commonly available to newly formed companies, small scale developers, or developers with little or no track record. The disadvantage is that generally higher fees are payable upon drawdown and they often require repayment within a short period of time – typically 18 to 24 months. It is therefore crucial that any purchaser has confidence that they will be able to complete any redevelopment within these timescales to then either refinance the development or sell the development to repay the loan.
Another common method of finance is a traditional mortgage. Mortgages tend to command lower fees and interest rates compared to bridging finance, and typically allow for a longer period of repayment (sometimes on an interest-only basis). However, there is a growing trend that for purchases through a company, lenders require the individual directors to provide personal guarantees. This means that should the company default on its mortgage obligations, the lender has the ability to call on the directors as individuals to satisfy the mortgage obligations. This generally results in higher legal fees to arrange the transaction and may impact on the availability of the individual to obtain personal finance.
Seek legal advice to avoid nasty surprises
Once a purchaser agrees to buy a suitable piece of land and they have a clear vision as to how to develop it, it is prudent to obtain independent legal advice. Even if a purchaser is familiar with a piece of land, there could be unknown legal issues that a legal advisor may identify arising out of undertaking searches or checking of the legal title at Land Registry.
Issues that are commonly encountered are: restrictive covenants which prohibit development in its entirety or prohibit development without the consent of a third party, missing rights benefiting the land (rights of way or utilities), and registered interest on the legal title such as leases, trust to third parties, bankruptcy notices or Charging orders.
All of these would need to be dealt with prior to purchase to ensure that there is no impact on the future saleability of any land, particularly at a stage when a developer is seeking a return on their investment.
Always ask permission not forgiveness
Finally once the development has been completed, it is important to ensure that any and all development works have been carried out with the relevant permissions and consents. It is a virtual certainty that any prudent purchaser’s solicitor will request sight of any planning permissions, building regulation approvals and completion certificates. Despite indemnity insurance policies being available for missing regulatory documents, in the case of development land indemnity insurance is not always available due to construction works only being recently completed. Any developer must consider the impact on saleability as purchasers of property generally now expect evidence that all works have been completed in accordance with the relevant regulations. Without such paperwork, a developer may receive reduced interest or offers, or at very worst, have its development considered unmortgageable.
Mitigate the risk with independent legal advice
There is always an element of risk when purchasing land for development. At Tallents Solicitors we have a wealth of legal experience to assist developers to identify land and advise on its financial and practical suitability. Please call us on 01636 671881 to arrange a confidential appointment.