Landowners & Developers: What is a Conditional Contract?

What is a Conditional Contract?

A conditional contract binds a Developer to purchase Land from the Landowner once certain conditions have been satisfied within an agreed time period. The most common conditions imposed on Developers are for certain planning applications to have been granted over the land subject to the contract, and we have assumed that is the case for this article, but conditions could be anything such as satisfactory environmental reports or a tenant leaving.  This allows the Developer to spend time and money on obtaining planning permission safe in the knowledge the land will be theirs once planning permission has been obtained and Landowners know that the land will be sold once that has happened. Simple? Well, yes, but as always, the devil is in the detail and there are lots of points that need to be considered.

The specified time period is known as the ‘conditional period’ and can be extended if there is a pending planning application or appeal in progress at the end of the agreed conditional period.

What is a long-stop date?

As there are many ways in which the conditional period can be extended, it is common for conditional contracts to include a ‘longstop date’ – which is an agreed date where the contract will be terminated, to avoid the conditional period running for an indefinite amount of time. 

Things to consider when negotiating a Conditional Contract

It is vital for both the Landowner and the Developer that the conditional contract clearly covers everything that it needs to. A few of the key things to consider when negotiating a conditional contract are:

 

1. The level of planning required for the condition to become satisfied

   • The Landowner and Developer must decide whether the condition(s) will be satisfied with the grant of an outline planning permission, or whether the condition will only become satisfied once there has been a grant of a “detailed planning permission”.

   • A Developer usually will want the planning permission to be satisfactory but what does that mean to the Developer? These requirements should be included in the contract, so a Developer is not obliged to buy the property with an unsatisfactory planning permission. However, a Landowner will not want the Developer to pull-out for a spurious reason so both parties’ lawyers must find a balance when drafting the agreement.

   • Are there any other conditions that a Developer wants satisfying before they are compelled to buy the land e.g., acquiring access rights, environmental issues etc.?

Developers generally seek to ensure that the planning permission(s) are detailed before they are legally compelled to purchase the Land.

 

2. Appeals

   • Will a Developer have to appeal a refusal? Will they have the right to appeal? These issues need to be agreed and included in the contract to provide the parties with certainty.

   • Appeals will not only affect the time-period of the application (meaning that the conditional period may need to be extended), but they also may lead to the Landowner or Developer being required to enter into further obligations in order to obtain the Local Authority’s consent to the planning application(s).

   • Third parties can also appeal a planning application up to 6 weeks after the grant of the planning permission. Appeals that are successful will render the planning permission void, and it is therefore imperative that provisions are included within a conditional contract to cover this risk. There have been cases where parties have been obliged to complete a purchase even though the planning permission has been quashed following a third-party appeal.

 

3. Planning Application Obligations

   • Landowner’s will understandably want a level of input into, and oversight of, the planning application, but a Developer may not be comfortable with this.

   • Parties should also agree on exactly what each parties’ obligations shall be, in relation to any planning applications submitted whilst the contract is active.

   • The Local Authority may only grant planning permission over the Land subject to the Landowner entering into a Section 106 Agreement with them. Developer’s will therefore look to ensure that provisions are included within the conditional contract, to ensure that the Landowner enters into the relevant planning agreements, so that they can ultimately obtain the relevant planning permission(s).

 

4. Consider the circumstances in which the contract can be rescinded

• There will often be certain scenarios in which the Landowner or Developer would prefer to not proceed with the transaction, and it is therefore imperative that the relevant provisions are included in the contract. For example, if the long stop date has expired or if satisfactory planning has not been obtained.

• The contract should allow for this and deal with ancillary issues such as copyright in the plans and what happens to any deposit paid on exchange.

Once all of the condition(s) have been satisfied, or the Developer has waived the conditions and decided to proceed to completion, they must purchase the Land by the date set out in the contract or be in breach of contract. Therefore, it is vital that the Developer has their funding in place well in advance of the completion date to prevent a breach of contract from occurring and should have finances in place before exchanging contracts. The purchase price itself can be a fixed price or determined using a formula in the contract, for example by reference to the market value of the property with planning permission.

Key Points

It is important to understand that there is no such thing as a ‘standard Conditional Contract’. It all depends on the specific transaction and parties’ requirements. A good contract will clearly set out when a Developer must buy the property, what the parties must do during the conditional period and what happens if the agreement is terminated.

Parties entering into Conditional Contracts must also consider the tax implications of entering into the Contract.

Contact Us here for more information or assistance

Dylan Mann, Commercial Property
Lawson West Solicitors, Leicester

Our Commercial Team is highly experienced in advising on Conditional Contracts and is able to work closely alongside fellow professionals, in order to structure the Contract in a manner that best suits your needs. If you are considering entering into a Conditional Contract, do not hesitate to get in contact with our Commercial Team today. Contact Us.

 

This article is not intended to be legal advice and cannot be relied upon or applied to any set of circumstances. For further guidance, please contact Lawson West Solicitors Limited.

 

View all