The Property Speculator

Creating a Property Development Contract with your Builder

Many private property developers aim to save money by carrying out some of the construction work themselves. This can often be very successful, and usually depends upon the competency and persistence of the developer. However, it also depends a lot on the developer having the time to do the work. It’s fine if the novice developer does not have to do a ‘normal’ job every weekday and can just concentrate on the construction/alteration works. Most developers, when beginning their ventures though have to juggle a day-to-day job and run their property ventures in their spare time. I can assure you from experience that having a full-time job and having to squeeze in work on another property in the evenings, weekends and holidays will test your motivation and persistence. In short, it gets quite stressful.

Apart from the obviously increased expense, it usually makes a lot of sense to get builders in to do the work for you (or at least the majority of it). The larger the project, the more benefit there is.

Where to start though? All developers will at some point come to this stage. Knowing that substantial outside help must be secured, but not quite knowing what to do first.

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The first step is to decide exactly what needs to be done to the property. On smaller projects where the work will only amount to a few thousand pounds (such as very minor alterations) the route will be different to larger projects of hundreds of thousands or even millions. On small projects it’s more likely the developer will have a good idea of what work they require the builder to carry out. It’s very important to write this down, placing it in logical steps. An example of this might be:

Lift Patio area to rear of property (state the extent of this if possible).
Re-route/prepare drains for foundations to comply with Building Regulations.
Dig and lay suitable foundations in preparation for extension.
Construct double-skin brick/block extension to full property height in accordance with planning conditions, tying bricks and blocks in with existing structure.

This list in its entirety should be concluded with important points, for example ‘all associated excess material and refuse to be removed from site upon completion’ and ‘all appropriate Building Regulations to be complied with’.

This list is often referred to as the ‘Scope of Work’ and becomes more important as the size of the project increases. The scope of work can help you out at this point by enabling you to obtain several different quotes for the work if you feel you would like to look around for the most competitive price (known as ‘going to Tender’). If the idea of compiling this list is daunting because you are not experienced enough to place the required work into steps, contact either a professional (such as a Building Surveyor, Architect or Structural Engineer) or ask a reputable builder who will not be actually doing the work (so that the scope of work is impartial) to help out.

The process of finding a suitable contractor with the use of a scope of work is called ‘Tendering’. The larger the project the more important it is to find a contractor that will provide the right work at the right price. Once the builder has been chosen to carry out the required works (it might be the one who produced the most reasonable quote, or the firm who you feel might be the best suited to the work you need carried out) the next step is to establish the terms of the builders contract.

In almost all cases (around 70% – 80%), a Joint Contracts Tribunal (JCT) contract is used to establish the terms of the agreement between client and contractor.

The contract type depends on the type and scope of work to be done. For the smallest work, such as a house extension a ‘Homeowner’ contract would be used. There is further choice within this, for cases where the homeowner is overseeing the work, and where a consultant oversees it. At the other end of the scale is a ‘Design & Build’ contract where the contractor actually designs much of the work to be done.

It must also be mentioned, that when a project is being designed by a contractor, the company MUST have the appropriate level of competence and Professional Indemnity insurance to carry out the design work. This can be achieved by outsourcing to a Structural Engineer or Architect. However it is asking for trouble if a small building contracting firm designs a structure, dwelling or substantial alteration themselves without the appropriate level of design competence. The worst case scenario is if the structure fails or becomes unsafe. As developer, it is possible you could find yourself in court under a charge of negligence for failing to ensure the project was properly designed. Always approach the planning of your project in a professional manner.

For a guide to choosing the most suitable JCT contract, visit their site at:

http://www.jctcontracts.com/contracts/choosing.jsp

Please note, this article has been considerably condensed. Buy for the full version for only £2.

Feb 15th, 2012

Using a Property Purchase Option

Quite often, a property developer feels that it is a better idea to build a property from the ground up rather than renovating an existing one. There are advantages to this approach, as there are definitely economies of scale involved when buying a suitable building plot. It usually works out far cheaper (per individual unit) to build several properties on a slightly larger plot, than one on a small plot.

With this in mind, one of the most important (if not THE most important factor at this point) is the establishment of planning permission for the build you intend to carry out. Once you have this, the capital value of the site can increase many, many times over.

This causes a problem if you intend to be particularly prudent with your finances. Do you:

Buy the land without planning permission and run the risk of not getting consent, and owning a useless plot that cannot be built upon? Or
Purchase a plot that already has planning permission in place at up to 10 times the price it was prior to the grant of planning consent?

Most novice developers follow option 2 and purchase the plot with either outline or full planning permission already in place. This offers the least amount of risk but is also the most expensive choice by quite some margin.

Professional property developers are not in the habit of spending money unnecessarily, they will seek the establishment of a Purchase Option on the land prior to buying it. This is a contract between the two parties (Vendor & Purchaser) that is ‘open-ended’. This means that one party can choose to exercise their right to buy something (at a price agreed prior to contract finalisation) or they can allow it to expire and take no further action.

The way a Purchase Option works is thus:

1. A property developer believes a particular plot of land is suitable for development, but presently has no planning permission in place. The plot is not currently for sale, so he traces the owner of the land through the HM Land Registry.

2. He consults the local Planning Authority as to the viability of obtaining planning consent on the plot. This is done informally and may only amount to a phone call, although a planning officer might visit the site to discuss the developer’s plans with him. If the planning officer believes that there are no obvious problems at this point, the developer is likely to be invited to submit a planning application.

3. The owner of the land is then approached by the developer and asked if he would sell the land to the developer subject to the satisfactory grant of appropriate planning consent. If the landowner agrees to this, a purchase price is agreed to (this is normally considerably below the full value of the site with consent in place, as the developer is still taking some degree of risk).

4. The developer usually pays the landowner a fee for the facility of agreeing to this contract, this is known as the Option Fee. It could be around a thousand pounds or so, depending on the size and scale of the project. This fee is the landowner’s, regardless of the outcome of any planning decision.

5. The Purchase Option contract is drawn up by a property Solicitor. It states:

a. The names of the two parties

b. An indication of the area of land (maybe accompanied by a plan)

c. The Option fee

d. The agreed purchase price of the plot

e. The term of the contract (this could be for 6 months, for example)

f. The precise conditions of the planning consent required by the Developer

6. The full version of the option contract is then signed by both parties. Now, at any time for the remaining term of the option contract, the purchaser (developer) can buy the plot from the vendor at the agreed price, provided the planning consent is satisfactory and any associated conditions are acceptable to the purchaser. The developer then has the plot he wanted, with suitable planning permission in place, at a price that was significantly less than it could have been.

7. If the planning permission is not granted on the terms the developer hoped for and it is unlikely that it will be granted, the developer can simply allow the term of the option contract to expire. This becomes worthless upon expiry and the developer is not financially committed to the land at all. The prospective vendor however, gets to keep the option fee regardless.

Option contracts are now fairly common, a lease option and a double lease-option are available but work in different ways to the purchase option. It is simply a contract that one party can choose to exercise or not, but the other party is legally bound to adhere to.

Purchase options can be fairly complicated, reflecting the nature of English & Welsh property law. Because of this, it is not really possible to download a contract template that will serve all situations. I highly recommend a Property Solicitor is consulted and asked to draw up the draft and final copies of the contract.

Jan 18th, 2011

Legal Obligations involved with Property Ownership

Part of being a successful property developer or investor, is knowing how to best deal with legal problems should they come along. You don’t have to be an expert like a Solicitor, but you should be familiar with the various terms relating to your legal obligations as owner of the land/property.

One of the main aspects of property law that novice speculators overlook is covenants. A layman’s definition of the term covenant, could be

‘a promise to either do something, or to specifically not do something in relation to the land concerned’.

A covenant is a contractual agreement where one party (the covenantor) agrees to do or not to do something for the benefit of the other party (the covenantee). The covenantor holds the burden of the covenant; the covenantee holds the benefit. When you purchase the land/property and sign the Agreement to Purchase, you effectively sign to adhere to the stated covenants within the deeds. Covenants are always for the benefit of ‘the land’, not a person. So if a covenant to not use the property as a shop is in place for example; the purpose of this will be to maintain the character of the property and the surroundings, not to prevent competition to other shops.

There are two main types of covenants:

1. Positive covenants. These require some payment or action such as the maintenance of gardens or to financially contribute to the maintenance of some common area.

2. Negative (or restrictive) covenants. These have the affect of preventing the party carrying out some action. For example a restriction on alterations or any use of the property other than residential.

Covenants are enforceable in law; if they are breached, an injunction to prevent further action may be issued. Damages might also be awarded to the aggrieved party for compensation.

The chances of having a covenant legally removed from the property deeds might be relatively slim. A covenant can be discharged in three ways:

1. By application to the Chancery Division. The landowner may apply to the Chancery Division of The High Court for a declaration of whether the land would actually be affected by the restrictive covenant. Sometimes, one or several of the permitted methods to establish a covenant cannot be proven to have been in place, making the covenant unenforceable.

2. Discharge at Common Law. The landowner may seek to establish whether the right to enforce a covenant has expired. If the property and surrounding area have changed considerably since its introduction or if the party enjoying the benefit is willing to release it, then the covenant can be discharged.

3. By application to the Lands Tribunal. The landowner will seek to alter the conditions of a covenant through this method.

An Easement is a right enjoyed by one landowner over the land of another, and is also related to the land not the occupier. It does not give any right of possession over the land however. Again, it will probably pass to the next owner of the land (unless extinguished-see below). The owner of land who enjoys a benefit over another is the Dominant Tenement. The owner of the land that holds the burden of the easement is the Servient Tenement.

Similar to covenants, there are positive and negative easements:

1. A positive easement allows the dominant tenement a right to do something on the servient tenement. For example a right of access to neighbouring land.

2. A negative easement allows the dominant tenement to restrict in some way the servient tenement holder’s use of his land. For example the right to prevent a neighbouring landowner building a tall structure that might block out light.

If you happen to own the servient tenement, it is a concern; easements can put potential purchasers off and might even devalue the property to some extent. However, if you happen to own the dominant tenement, an easement will be a benefit to you. Or you might feel that the establishment of an easement will benefit the property you own. Easements can be created by the following means:

1. Express grant. This is where a landowner sells part of his land and wishes to retain some right of access or the restriction of the land use in some way. Also used when neighbours wish to create a formal agreement between them relating to their particular properties.

2. Easement of necessity. This might be implied in a transaction that leaves a particular property landlocked and a right of access across a neighbours land is required.

In both cases, a solicitor will be best placed to create the easement. A formal agreement will be created, signed by the parties involved, registered with the Land Registry and included with the property deeds.

Easements can be dissolved by the following means:

1. By statute. The passing of a particular Act that has the affect of dissolving the easement.

2. By express release. This is when the parties involved (dominant and servient) choose to bring the agreement to an end.

3. Implied release. This is when the agreement can be proved to have been abandoned by the dominant owner.

4. Where the interests of the neighbouring properties (linked by the easement) become owned by the same person.

The simplest way to deal with an easement that proves to be highly inconvenient for you is to approach the other party (or ask your solicitor to do it) with the intention of amending the agreement. This would be done through a deed of variation. Both parties would sign the deed and this would then become binding on both parties.

The grant of even the most informal and temporary rights of way should be approached with caution. Access across someone else’s land, if used at least once a year for a period of 20 years or more (the law’s measure of regularity of use) can be applied for, in order to become a permanent arrangement. A way round this is to make the arrangement a written one and a ‘peppercorn’ annual rent of £1 or so charged so that it becomes a ‘wayleave’.

A wayleave is similar to an easement but the servient tenement charges a rent. Wayleaves are most commonly associated with utility companies running pipes, cables, drains etc through a servient tenement and are subject to rent. In common with an easement, a wayleave does not give any right of possession in law.

Nov 15th, 2010

What to look for in an Investment Property Lease

If you are searching for an investment property that does not require (much) work to be carried out, there is a good chance that you will find yourself evaluating a property that has a tenant already in occupation. Under The Land Registration Act 1925 and 2002, if you purchase the Freehold interest in a property, you are legally obliged to honour all existing leases and agreements. In law, the rights of the person(s) in occupation override that of even the freeholder’s.

The terms⃰ of any lease in place on the property will affect its value to some degree (for example, a poor ‘quality’ tenant in place for the next 15 years does not represent an ideal situation and subsequently will be less desirable than a good quality tenant that renews a lease regularly). The main aspects of any tenancy agreements are:

Parties involved. All tenants and the Landlords name or company will be stated on the tenancy agreement.
Lease term. This is the period of time the tenant is permitted to occupy the property. This period may be either reduced, extended or become ‘open ended’ by agreement with the landlord. What commonly happens in residential tenancies is that the initial term is set at 6 months. The tenant may then continue in occupation (with the landlord’s approval) for an indefinite period of time, paying rent on a monthly basis. This is what is known as a ‘periodic tenancy’. The frequency of rent payments then becomes the period of notice for either party to bring the agreement to an end. For example if the rent is paid monthly, then the landlord or tenant can give a months’ notice to bring the occupancy to an end.
Rent Payable. This is the sum of money charged regularly by the landlord so that the tenant is permitted to remain in occupation. The rent is set initially as the tenancy agreement is created. Residential tenancies are usually paid monthly in advance; commercial ones are usually quarterly in advance.
Deposit payable (if any). This will be stated in both words and numbers.
Rent review. This is a clause in the tenancy agreement that allows the landlord to increase the rent payable so that it reflects continually changing rent values. It is very common in commercial tenancies but less common in residential ones. After the initial rent level is set at the beginning of the lease term, it might be reviewed at 3 yearly intervals (for example) to increase in line with the general level of economic inflation. Sometimes these reviews (most commonly commercial) are ‘upwards only’; meaning that the new rent level will be the lowest value of either the existing rent level, or a sum agreed by both parties as being an accurate reflection of current rates. In the event of disagreement of this level, the tenancy agreement will prescribe a method of establishing a new rent by a third party.
Break Clause. In place on commercial properties. This is a clause that allows either the tenant or the landlord to bring the agreement to a premature end. This is very often subject to around 6 months notice. Landlords sometimes charge a premium to compensate them for the risk of a subsequent rent void when the tenant moves out. This has mixed opinions amongst property professionals, some regard it as justified, and others see it as completely unnecessary.
Security of Tenure. This is a legal term that means the landlord cannot simply evict the tenant. It is now almost extinct in residential tenancies. Only agreements entered into before the 15th January 1989 are protected (known as Rent-Act tenancies), and provide the tenant with security of tenure. This has the result of substantially reducing the property value to around 50% of that in vacant possession. However, that is not to say that tenants under more recently drawn up contracts can be evicted on a whim. Far from it. You cannot evict a tenant without a Court Possession order. If a tenancy agreement has been in place, it cannot be substantially changed even if it is renewed. Any new agreement must be on similar terms. All residential tenancies granted after the 28^th February 1997 are ‘Assured Shorthold Tenancies’. This still provides the tenant with security of tenure, but the landlord will be granted a possession order on certain grounds after the initial term of the lease has passed and it has become a periodic tenancy. The specific grounds for possession are listed in the Housing Act 1988.

Commercial tenants are automatically given the protection of security of tenure under the Landlord and Tenant Act 1954 (known as the ’54 Act). This means that tenants can only be evicted under particular circumstances (such as the landlord wishing to occupy the property or develop it). The parties involved can specifically opt out of this act if it suits their circumstances. This is known as an ‘exclusive’ agreement, as opposed to an ‘inclusive’ one. This act can have quite an effect on the value of the tenancy, for an inclusive agreement puts the tenant in a strong position and an exclusive one does the same for the landlord.

When taking on ownership of an investment property with tenant(s) already in place, great care should be exercised in establishing which tenants actually should be in occupation. Once the conveyance process is completed, anyone in occupation of the property (whether they pay rent or not) is automatically granted rights to remain there. If you later find out that individuals should not be in occupation, court action might be required if they will not co operate and move out.

In all leases, there are ‘implied’ covenants adopted. These are:

The Tenant:

To pay rent as agreed.
To pay utility bills as required including connection fees.
To vacate the property upon lease expiry
To keep the property in good condition and not to commit ‘waste’ (which is where the tenant allows the property to fall into substantial disrepair through neglect)
Not to make any alterations to the property other than with the express, written permission of the landlord.
To allow the landlord (or representatives) access to the property (normally subject to 24 hrs notice) for the purpose of maintenance or inspection.
A requirement to report any damage to the property to the landlord to enable him to repair it or make an insurance claim.
Not to change the locks on the property with express permission.
To allow viewings of the property for prospective tenants within 2 months of term expiry.

The Landlord:

To keep the property in acceptable, habitable condition for the tenant.
To allow the tenant ‘comfortable enjoyment’ of the property.
To insure and keep insured the property against the usual fire and other risks.
To return any rent paid to the tenant for any period the property is not inhabitable.
To cover any outgoings that the tenant does not pay.

The landlord has the right to enter the property if the rent remains unpaid for 14 days or more; or if the tenant breaches his covenants or enters bankruptcy proceedings.

⃰Note. In property law, the word ‘Term’ (singular) refers to the length of time of the lease; whereas the word ‘Terms’ means the conditions contained in the lease agreement that the tenancy is based upon.

Sep 5th, 2010