In the UK, developers and landowners often make pre-emption agreements. These agreements give developers the first chance to buy the land if the owner decides to sell it.
In this article, we're going on a deep dive into these often overlooked agreements. We'll explain what they are, why they matter, and how they work. We'll talk about the laws that govern them and give you practical tips on how to deal with them if you're involved in a property deal.
Table of Contents
- What is a pre-emption agreement?
- What is the difference between an option to purchase and a pre-emption agreement?
- Types of pre-emption agreements
- What should a pre-emption agreement include?
- What are the advantages of a pre-emption agreement?
- What are the disadvantages of a pre-emption agreement?
- What happens if a pre-emption agreement is breached?
- Is a pre-emption agreement legally enforceable?
- What are the alternatives to a pre-emption agreement?
- Should you agree to a pre-emption?
What is a pre-emption agreement?
A pre-emption agreement can give a person or organisation a choice to buy land or require them to do so.
Pre-emption agreements are often registered at the Land Registry with a restriction that lets others know about the right, making sure the land can't be sold without the knowledge and approval of the potential buyer.
What is the difference between an option to purchase and a pre-emption agreement?
Option to purchase, often called option agreements, work similarly to pre-emption agreements in that they're made between developers and landowners when both parties are considering a sale. The main difference is their purpose.
While pre-emption agreements give the first right to buy land, option agreements typically give a person or company the right to demand that the landowner sell to them.
Under an option agreement, the potential buyer can buy the land at an agreed price or at a price to be decided later. The landowner usually charges a fee for granting the option. Like pre-emption agreements, the option period is limited to prevent the land from being tied up by developers, allowing other interested parties to have a chance to buy it.
Options give holders significant power, as they can choose whether to buy the land or not. During the option period, the landowner can't sell the land to anyone else. If the option holder decides not to buy the land when the period ends, the landowner can then consider other buyers.
Types of pre-emption agreements
There are two main types of pre-emption agreements:
Conventional call pre-emption agreement
In this type, a person or company has a right to buy the land before anyone else. The seller must offer it to them first, but they are not required to purchase it.
Put pre-emption agreement
In this type, the seller can make the buyer purchase the property. This is useful for sellers who aren't ready to sell immediately but have a committed buyer.
What should a pre-emption agreement include?
Drafting a pre-emption agreement requires careful consideration of various factors to ensure fairness and enforceability. If you're unsure on what to include, a commercial property solicitor can help you.
A comprehensive pre-emption agreement should outline:
How long the pre-emption period will last
Details of the property (including Land Registry titles)
What will trigger the landowner's obligation to offer the property for sale (definition of disposal)
The purchase price or the method for calculating it
The form and content of the offer notice and how it should be served on the prospective buyer
How long the acceptance period will last
What happens if the offer is rejected
How disputes will be resolved.
What are the advantages of a pre-emption agreement?
Pre-emption agreements offer a sense of security for potential buyers, giving them first refusal to purchase a property if the landowner decides to sell.
Additionally, pre-emption agreements can benefit landowners by saving them the hassle and expense of putting their property on an uncertain open market.
What are the disadvantages of a pre-emption agreement?
A significant disadvantage of pre-emption agreements is that the seller doesn't have to sell the property, meaning the agreement may never be effective. This can be pretty frustrating for potential buyers!
For sellers, a drawback is that a pre-emption agreement, as indicated by a Land Registry restriction, can put off other potential buyers from making an offer.
What happens if a pre-emption agreement is breached?
When a pre-emption agreement is breached, it's considered a breach of contract. This means the party affected by the breach can seek contractual remedies, like getting a court order for specific performance or claiming damages from the breaching party.
The first step after a breach is to try resolving the issue through dispute resolution, as outlined in the agreement. Alternative dispute resolution (ADR), such as mediation, is often preferred. It's quicker, cheaper, and allows for a compromise that can preserve the relationship between parties.
Is a pre-emption agreement legally enforceable?
Yes, pre-emption agreements are legally binding. They only kick in when a landowner decides to sell their land after signing.
It's essential to have the agreement in writing to prevent disputes. For example, if one party doesn't follow the terms.
What are the alternatives to a pre-emption agreement?
One common alternative is an option agreement, which gives a buyer the right to purchase a property or land within a set timeframe. These agreements can be triggered by events like getting planning permission.
Another option is conditional contracts. These agreements include specific conditions that must be met before a sale can go through. For example, the sale might be dependent on renovations being completed or a tenant being evicted.
Unlike pre-emption agreements, conditional contracts don't have a time limit. Instead, they rely on fulfilling certain conditions.
Should you agree to a pre-emption?
Deciding whether a pre-emption agreement is right for you depends on your circumstances and objectives.
At Lawhive, our network of commercial property solicitors has extensive experience assisting landowners and developers with land transactions. We'll work closely with you to determine the most suitable agreement based on a thorough understanding of your goals.
Whether you're a landlord approached by developers or a developer unsure about the right purchase structure, our team is here to help. Contact us today for expert guidance on property and conveyancing matters.