Materialising development value is a long and winding road where the destination value and cost are often not known on the day when the vendors and developers agree to a sale, writes Mark Pellow of Vickery Holman:
Valuations are not based simply on what planning consent is ultimately achieved, but also the hidden costs in the development, for example decontamination, ecology conservation and highway works. These issues cannot be fully identified until consultations and investigations have been undertaken. Consequently purchase prices are often not fixed until these are clarified.
As a result of higher costs, not least community contributions including Affordable Housing, land prices are not what they once were and often some way short of what vendors had dreamt of or aspired to.
There are a number of methods of calculation of the price, the most common being market value or percentage of market value. However this can often leave room for dispute and disappointment when the original dream price is not realised.
Critical to this situation is to agree a minimum price as this way vendors have some certainty when the aspirational price is not met. One method of assuaging disappointment is to utilise “overage payments”. These are designed to allow vendors to share in some of the ups, as well as the downs, of the development process. Overage calculations come in various forms, but the most transparent and simple are often the best as once more an area that often leads to dispute in finding a resolution. They can be based upon a percentage of the ultimate sale prices, the number of units consented, or various combinations or variations.
The legal Agreement whether an Option or Conditional Contract is vitally important, with the definition of the calculations and the security by way of a legal charge all crucial if the vendor is to have any chance of living the dream.
