Real estate building blocks - Pre-emption agreements

In the latest of our Building Blocks series, Aidan Welton looks at pre-emption agreements and discusses the key points to consider when entering into one.

What is a pre-emption agreement?

A pre-emption agreement, sometimes referred to as a right of first refusal or a right of pre-emption, is an agreement between a landowner and a prospective buyer whereby the prospective buyer (also known as the beneficiary) has the exclusive right to purchase the relevant property should the landowner decide to sell. If the beneficiary declines to purchase the property, it can then be sold on the open market.

How does a pre-emption agreement differ from a call or put option agreement?

Under a pre-emption agreement, the beneficiary does not have the ability to compel the landowner to sell the property, in contrast to the position of the beneficiary of a call option. Nor does the landowner have the ability to force the beneficiary to buy the property, as they would do under a put option agreement. The pre-emption right will only bite if the landowner decides to sell.

The arrangement only really benefits the potential buyer as it will be at their discretion to accept any offer made by the landowner to purchase the property. The landowner typically does not receive any benefit except for a payment made to acquire the right in the first place.

When might I want a pre-emption right?

Typically pre-emption agreements are entered into where a landowner does not yet have a fixed intention to sell the property and there is an interested party, usually a neighbour or someone with a special interest in the land, who is prepared to wait to acquire the land (or interest).

What are the key points to consider when negotiating a pre-emption agreement?

• Purchase price - This may be a fixed price, subject to valuation, or could be linked to any bona fide third-party offer the landowner receives. If the price is subject to a valuation, this process needs to be clear and ideally details of the valuer, methodology and a dispute resolution mechanism should be agreed in advance.
   
• Agreed period - How long will the landowner be bound by the right of first refusal? This will depend entirely on the nature of the land in question and the commercial interests of the parties. This also needs to be balanced with the other commercial terms. For example, if you are a landowner, you are unlikely to want to agree a fixed price for ten years as the value of the land (depending on its nature) is likely to increase during the period. Conversely if the pre-emption period is short, the buyer may want the certainty of a fixed price rather than the hassle of a valuation.
   
• Timings - How much notice does the beneficiary need and how much time should they have to consider the offer? Once accepted, how long does the beneficiary need to complete if, for example, they needed to arrange a mortgage or other finance? Typically, the landowner will want these periods to be shorter so that they can dispose of the property quickly on the open market if the beneficiary elects not to purchase the property. The beneficiary will want maximum flexibility (i.e. longer periods), especially if they have paid a premium on entering into the pre-emption agreement.
   
• Contact details - The nature of the agreement necessitates that written notices are served. Accordingly, both parties will need to specify addresses for service. If the agreement will run for a number of years, then careful consideration needs to be given to those details both at the time of the agreement and during its lifetime. Any offer notice served by the landowner will need to be accepted within a strict time frame.  If the beneficiary’s contact details have changed, and they have not updated the landowner, then they could lose out.
   
• Protection - The agreement itself is not an interest in land (save for when determining priorities of interests in registered land) but it is capable of being protected at the Land Registry by either an agreed or unilateral notice. Ideally the beneficiary will also want to put a restriction on the landowner’s title which will prevent the landowner from selling the land without complying with the terms of the pre-emption agreement.
   
• Taxes - VAT may be due on any premium paid for the grant of the right, regardless of whether the landowner has opted to tax the land.  Pre-emption agreements are treated as land transactions for the purposes of calculating SDLT, and consideration should be given as to whether the grant of the pre-emption right is linked to any subsequent purchase of the land. There may be other direct tax consequences which are beyond the scope of this article.
   
• Insurance - If the parties have agreed a fixed price for the property, the buyer is likely to want an obligation on the landowner to keep the property insured and, in the event of insured damage, use the proceeds to reinstate the damage (or potentially handover those proceeds to the beneficiary if they acquire the land). This may (but not necessarily) be less of an issue where the price is to be determined by reference to market value.

The above is intended as an overview of pre-emption agreements and is not a comprehensive analysis of the relevant law and background. If you have any questions on the above or require advice in this area, please contact our real estate team.