Securing rights to future payments after the sale of land…
7 June 2019 by Ellen Petersen
Several projects that the commercial property team has been working on recently, have discussed the use of a “ransom strip” in connection with the sale of land. Ransom strips are not a new development. Retention of a ransom strip has become (anecdotally at least), a favoured way to secure further consideration for land (a kind of overage payment). This is especially the case where further development of the land may be envisaged.
Before going in to too much detail, it is worth exploring the significance and applicability of retaining a ransom strip; for example in the sale of development land. It is also worth looking at the alternatives, if only to consider all options, before ruling anything out. The important point to note is that the retention of a ransom strip acts to secure the payment to a seller of an additional sum; this will be at some future date for the release of a covenant, or the sale of the ransom strip.
What is the meaning of a Ransom Strip?
In a transaction involving a sale off, the seller retains ownership of a strip of land adjacent to, or across, the land being sold. This could prevent the buyer from developing the land. For example, if the development would require access over the ransom strip to the public highway, the buyer will not be able to proceed unless the seller sells the ransom strip; or grants a right of way over it, for the purposes of the development in return for payment.
However, the High Court has held that the value in the ransom strip was determined by the price that could be obtained from the person with the special interest in buying the strip; that is, the owner of the ransomed land. This was substantially less than the 33% to 50% share of the ransomed land’s development value; which is what the owner of the ransom strip wanted.
Clearly, there are advantages in retaining a ransom strip in that it may be an effective tool to prevent development. One hazard with a ransom strip is that the buyer might be able to negotiate access over neighbouring land; which would render the ransom strip worthless. Its existence may also have an effect on the property’s market value; as well as the amount that the seller realises on the actual sale to the buyer. It may also cause difficulties for the buyer in raising finance on the property.
As an alternative to a Ransom Strip, the seller might instead:
- Opt to retain certain rights over the land which has been sold in favour of the seller’s retained land; this would also prevent development of the property unless they are released. The buyer would then have to make an additional payment to the seller in order to develop the land.
- Agree an overage provision. This is where the buyer enters into an agreement with the seller to make a further payment; if an event (such as the grant or implementation of planning permission for development) should occur in the future in relation to the land.
- Agree a restrictive covenant. This is where the buyer covenants with the seller that it will not build on the land; or use it for particular activities. The land can then only be redeveloped or used for the prohibited activity if the covenant is released. In return for entering into a deed of release of the covenant, the seller can demand a payment. A covenant can be released once payment has been made. This method can only be successful where the seller retains land that must genuinely benefit from the restrictive covenant.
All the above methods can be time-consuming and tricky to agree and draft. The method used often depends upon whether the land in question is “ripe” for development. Prospects for development are important in deciding how to bind the land in question. A good surveyor and planning consultant will be important in deciding how best to maximise potential in land.
Read other articles by Ellen Petersen: