Legal: Best value for development land
PUBLISHED: 12:28 23 June 2015 | UPDATED: 12:32 23 June 2015
With an upswing in developers seeking sites for new homes, John Wiblin, arbitrator and partner at Longmores Solicitors in Hertford, explains how a value is put on privately-owned land for development
New housing estates are springing up everywhere. After a lull, developers are building again. In many instances the developer will have acquired ears ago the right to buy the land on which a new development is built.
A legal right to buy land at a future date is called an option. If you have given (or are about to give) a developer an option on land, or if you own land that might be suitable for future development, you will want to know how the sum the developer pays the seller for the land is decided.
Developers’ standard contracts usually state that the land value will be determined by an arbitrator – a privately paid judge, typically a senior surveyor chosen by the president of the Royal Institution of Chartered Surveyors – and that the land is to be valued at a stated date. That date may be years before construction starts, so if property values rise after the valuation date, the seller won’t benefit.
The land seller and the developer will each have is or her own surveyor and solicitor to formulate and present the case to the arbitrator. Most surveyors will value the land in the following way: first they estimate the sum each home in the planned development would have sold for at the valuation date. Then they estimate the developer’s costs of building and marketing the development at the time and allow a reasonable profit margin. Finally, they deduct the latter from the former. What remains is the land value.
However, when two surveyors do this exercise they rarely come to the same figure, and so the arbitrator has to make the final decision. If one of the surveyors’ valuations is significantly at variance with the arbitrator’s final number than the other, the arbitrator may order that surveyor’s client to pay the other party the costs of the arbitration.
If you are about to enter into an option agreement you should:
● Take professional advice at the outset.
● Consider inviting the developer to agree that the land value be decided by a single jointly-instructed surveyor instead of an arbitrator. That way you pay for one surveyor instead of two (including the arbitrator), or three if you ‘lose’ the arbitration and have to pay for the developer’s surveyor too.
● Scrutinise the proposed valuation date carefully.
● If the process has moved on from the above, then choose a surveyor and solicitor with previous experience of land valuation arbitrations to increase your chances of getting the maximum value for your land.