Earlier this month, the Senedd announced a joint consultation with the UK Government for the devolution of powers to allow the Senedd to introduce a Vacant Land Tax (“VLT”) in Wales. This has been mooted previously but appears to be gaining a new lease of life.

The rationale behind this initiative is that it would bring more houses into active development and prevent so-called “land banking” (the process of sitting on land benefitting from planning permission rather than developing it). However, no details have been given as to how such legislation might be structured, or how it would work in practice.  There are, though numerous issues for landowners to consider, here.

The most obvious risk for a landowner would be in granting an option agreement to a developer. Under this type of agreement, the developer will have an “option”, rather than an “obligation” to acquire targeted land in the future. Many such options are structured to give the developer flexibility about when to exercise their right to buy, and many contain provisions by which the option can be extended, during its life. The risk for a landowner would be to see planning consent granted on their land but the option exercise then delayed, or else not made, leaving them potentially in a position where they were exposed to VLT.

It is, of course, counterintuitive to think that a developer that has spent large sums of money obtaining a planning consent would then seek not to capitalise what they have created. One also hopes that this is a risk that will be acknowledged in any legislation on the basis that a landowner should only be taxed where it was not legally or contractually constrained from taking forward any development. However, a wise landowner will seek to mitigate this, in any option agreement, via one of potentially three routes:

1. Not permitting extension of any option in circumstances where a consent has been granted if VLT may arise thereafter.
2. Giving the developer a defined period to either elect to exercise their option or else to lose it – the “use it or lose it” principle.
3. Seeking an indemnity from the developer in respect of VLT, where it becomes payable where an option has not been exercised.

For the developer, concerns must be weighed in the inverse. The developer will be uncomfortable with any provisions that impose timescales or restrictions on its ability to work freely, given that the process of obtaining planning consent can be lengthy, costly and unpredictable and it needs space and time to navigate this. The developer will also be very cautious of offering any kind of indemnity, not least where the full extent of liability is not known.

What we can be sure of is that such legislation, if brought forward, will need to be carefully considered and well legislated if it is not going to negatively impact the development and planning landscape of Wales. “Land banking” is not the problem in Wales, we suggest. Rather, it is a lack of supply that is causing issues in the development sector, and the route to mitigating this is in streamlining the planning process and better resourcing massively stretched local authority teams.

To discuss the above in further detail email Senior Associate Solicitor Amber Ellis-Martin a specialist within our Real Estate team. Additionally we will update the RDP website with a further note if the Senedd release more information following any joint consultation.