Real Estate Housebuilder Tip of the Month - Deferred Payments and Security

Published 29 noviembre 2022

The purchase price paid for development land may sometimes be deferred. The purchase price may paid in the future in one lump sum or there may be phased payments of part.

Deferred payments frequently go hand in hand with a legal charge over the land sold in favour of the seller. This gives the seller security in the event that the deferred payment is not made.

Where the deferred payment relates to the whole of the purchase price, a legal charge over the whole of the land sold is appropriate. This charge is then released in its entirety when the full purchase price is paid in a single payment.

Where the deferred payment relates to part of the purchase price or phased payments, it is not unusual for a charge of part to be agreed or for the charge to be released over pre-agreed parcels of land as each tranche payment is made. This approach is an attempt to solve the commercial challenge for the developer in needing to sell units free from charge while further tranches are not yet paid for. In this scenario, the seller will be keen to ensure that the land charged is always adequate security for the value of the outstanding payment but also that, in the event of buyer default, the charged parcel is capable of surviving as a stand-alone scheme. However, as a developer you will want the ability to sell houses free from charge at the first available opportunity. Satisfying these two commercial drivers is not always straightforward.

The challenge is that a designated 50% parcel of the bare land doesn’t necessarily reflect 50% of its value when layout and development are taken into account. Even when layout and development adjust the extent of the charged parcel; the secondary consideration of that parcel being capable of independent delivery (access, utilities, easements etc.) may require those boundaries to be changed further. All of this takes time and requires negotiated compromise.

Our tip is to ensure that where a phased approach to deferred payment is being agreed; that negotiation of the relevant areas to be charged and subsequently released begins as early as possible in the deal. For further information please contact Daniel Kendall in our Residential Development team.