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Dealing with surplus land

Property sale 827489 s 146x219Tiffany Cloynes and Rebecca Hazeldine explore the options available to local authorities to deal with surplus land.

As pressure continues on local authorities to deliver value for money so has the need for local authorities to show that they have maximised the benefits and returns from their assets.

This could involve combining a number of strategies, ranging from reducing the cost of the public estate, using assets purely for investment, commercialisation, office rationalisation, disposing of surplus and underperforming assets to using assets to stimulate economic growth and regeneration.

In this article, we propose to concentrate on a few of the options available:

1. Straightforward sale to a Purchaser

This would involve a straightforward sale of land to a purchaser at “best consideration” which would enable a local authority to generate a capital receipt quickly by disposing of the asset. The sale could take place simultaneously with exchange or be conditional upon the receipt of planning permission.

In a “straight forward land transaction” there would be no requirement for a competitive procurement process to be undertaken pursuant to the Public Contract Regulations 2015 provided there is no legally enforceable obligation on the purchaser to develop the land.

A local authority would only be able to consider what is to be built on the land sold in its role as planning authority rather than as a previous landowner.

2. Granting a long leasehold interest

A local authority could retain the freehold interest in its surplus land and a grant a Lease to an occupier for a term at a market rent. The lease would contain provisions relating to the rent payable, rent reviews, repairing and maintenance obligations, permitted use, alienation, break clauses, insurance and service charges.

By retaining the freehold, a local authority will potentially be benefiting from both revenue streams (i.e. rental income) and capital growth.

The grant of a lease without any development obligations would not fall within the scope of the Public Contracts Regulations 2015 and so would not need to be the subject of a competitive tendering process.

3. Procuring a Developer – Development Agreement

A local authority may wish to run a competitive procurement process (if above the threshold) to procure a Developer to develop the surplus land in accordance with the Public Contract Regulations 2015.

The local authority would enter into Development Agreement with a Developer which will contain development obligations on the Developer to procure and carry out the development within prescribed timescales. If the Developer failed to carry out the development, the local authority would be able to terminate and step in (subject to any funders priors rights).

Once the development has been completed, a local authority will transfer the freehold interest or grant a long lease to the Developer.

4. Sale to Purchaser with option to buy-back (Flensburg)

A local authority may wish to dispose of a surplus land to a purchaser but provide for some limited obligations in the contract to build out by using the Flensburg principle (which has been confirmed in a number of recent cases).

The Flensburg principle is basically for the parties to have a statement of intent that the land will be developed in the documentation but to place no legally binding obligations on the purchaser/ developer to carry out the development. This is coupled with a right for the local authority to re-purchase the land in the case, for example, of the development not being constructed by a certain date. In effect, the positive obligations one would normally see in a Developer Agreement are “inverted”.

This would not require a competitive procurement process to be undertaken provided there is no legally enforceable obligations on the purchaser to develop the land.

5. Asset Backed Delivery Vehicle (Joint Ventures)

An asset-backed delivery vehicle involves a local authority and a private sector partner establishing a corporate entity into which the local authority transfers land and the private sector body invests funds to match the local authority’s contribution. The parties involved in an asset-backed delivery vehicle would usually agree a business plan to set out the objectives and outcomes which they expect from the vehicle. They would also need to agree budgets and procedures for approving individual projects.

One advantage of using an asset-backed delivery vehicle is that it enables a local authority to make effective use of its properties, whilst also providing opportunities for income generation.

Whenever the local authority is disposing of land, it will need to ensure it is acting within its powers. Section 123 of the Local Government Act 1972 gives a local authority power to dispose of its land. If a local authority uses the power in section 123 of the Local Government Act 1972 to dispose of land, that is subject to a requirement to obtain the best consideration that can reasonably be obtained, unless the disposal is for a short tenancy or the local authority has consent from the Secretary of State. The consideration which a local authority must take into account when assessing best consideration must have an economic value.

There may also be other specific powers a local authority will need to consider when disposing of particular types of land, for example land held for planning purposes, school playing fields and allotments.

Tiffany Cloynes is a partner and Rebecca Hazeldine is an associate at Geldards LLP. Tiffany can be reached on 01332 378 302.

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