Legal due diligence on residential development sites – not to be overlooked

You have found a site with potential for residential development, heads of terms are agreed and you are ready to proceed full steam ahead with the transaction. You, the developer, and the landowner instruct solicitors, and thoughts naturally turn to the contractual documents. 

However the process of legal due diligence before contractually committing to a site is essential, and should never be overlooked. It is paramount that such due diligence begins at the earliest opportunity, so as not to hold up the transaction further down the road. 

Why would I need to carry out due diligence on land?

Whether you are venturing into residential development for the first time, or are an experienced developer who is well acquainted with the due diligence process, it is important to remember why this process is required. 

The common law principle in property transactions in the United Kingdom is “caveat emptor”, which quite literally means “let the buyer beware”. The onus is on you to fully investigate the site, which is where your legal advisors come in. 

The process, at its heart, is the identification of issues, barriers to development or service connections and most importantly finding satisfactory resolutions to any issues identified. It is important to have a solutions focussed legal advisor on your side, who deals with issues in a practical and if required innovative manner. 

The professional team 

It is likely you have carried out some level of initial due diligence on the site already before agreeing heads of terms. Whatever progress has been made, once the legal due diligence has begun it is important for your professional team to be appointed at the same time (if they have not been so already). It is imperative that your legal advisors have a joined up approach with the other professionals in your team as there will be crossovers and the sharing of information is often key. 

On the theme of having a joined up approach with your third party professionals, internally when dealing with legal due diligence it is often a team effort between departments. The Birketts Housebuilder team often works closely with our colleagues in the following teams: Property Litigation, Agricultural, Planning and Environmental, Rights of Way/Light Specialists and Corporate Tax.

What is involved?

The process can be broken down into the following four broad stages. 

1.Site visit

The importance of a site visit from the outset of a transaction cannot be overstated. It is good practice to visit a site wherever possible, conducting a walk of the boundaries and taking photographs of the whole site.

A site visit will not reveal all legal issues, but it is a good place to start! Issues such as public use, potential encroachments by neighbouring landowners and undocumented services are easily identifiable. 

2. Title investigation

The “title” to a property is the landowner’s ownership documentation and our first responsibility as legal advisors is to ascertain that the landowner does own the whole site. 

Our review will also consider title restraints which may not only affect or delay development, but which also may impact on future parcel or plot sales or development profit. Our work will also look to resolve such issues, whether that might be by formal variation of rights and obligations or obtaining indemnity insurance. 

3. Searches

Desktop commercial searches and development specific searches are obtained, again in order to identify any issues that exist and to provide a deeper understanding of the site and the ability to service the site. It is for the legal advisors to review these, make further investigations where needed and report on the findings.

It is the development specific searches which differentiate the search process on a residential development site from that of a standard commercial property purchase. Examples of these include:

• 3.1.1 Utility searches to ascertain what services exist and the location of them in proximity to the site (if not directly affecting the site);
• 3.1.2 Optional enquiries of the local authority which wouldn’t usually be asked relating to road proposals by private bodies, proposed pipelines, environmental and pollution notices affecting the site, hedgerow notices and whether a site is classed as an Asset of Community Value, Common land or a Town and village green; 
• 3.1.3 Location specific searches such as a Cross Rail or HS2 search in or around London, compared with a Coal Mining Search in the Midlands or the North of the UK. 

4. Replies to enquiries

As standard, the landowner should fill in form CPSE 1 (Commercial Property Standard Enquiries). This form contains important information that you need to be aware of, like whether the land is opted to tax meaning that VAT is payable on top of the purchase price or if there are any on-going disputes involving the land. 

Responses to this form are typically evasive and vague, and it is our role to review and challenge those responses where needed to draw out relevant information. 

If you have any questions on this article or the services we can offer housebuilders please contact Steven Kay, Head of Housebuilder Sector Group.