At Blake Morgan, we often need to bring our expertise with different areas of the law together to recommend the best way to structure a deal. Doing this can save the client money and help the transaction proceed more smoothly.
One example is where a local authority is to acquire a site for development. The legal team might be led by a specialist in the real estate team with input from planning lawyers, an SDLT specialist and a public procurement expert. In a typical scenario there are various purchase structures open to them.
Where the existing owner of the land is a developer the purchase structures available include:
- having the existing owner complete the planned construction so the council can buy a finished building on a “turn-key” (ready to occupy) basis; or
- the council buying the cleared site as it is, and after completion of the land transfer the council employs the same developer to construct the building.
Many factors including cash flow and risk will inform the choice of structure, but two relevant aspects are the stamp duty land tax (SDLT) liability and the rules relating to procurement of building services by local authorities.
How the purchase is structured affects how much SDLT the local authority pays
For example, the total value of the package might be £12m with the bare land being worth £4m and the construction costs being £8m. We will ignore VAT for the purposes of this example.
- If the property is bought on a “turn-key” basis with the transfer of the property occurring after practical completion of the building works then the SDLT on £12m would be £589,500.
- If the bare land is acquired for £4m and the construction work is done afterwards (a buy and build structure), then utilising the principles in the 1992 case of Prudential Assurance Co Ltd v IRC, SDLT would be due on £4m and would be £189,500.
Using a “Prudential structure” can save SDLT
So what is a “Prudential structure” and how does it work?
In the Prudential case itself (decided in the days of “stamp duty” rather than SDLT) there was a contract to buy land from a seller and a separate contract for the seller to build offices for the Prudential after the land had been transferred. It was held by the House of Lords that stamp duty was due on:
- (a) the price contracted to be paid for the land; and
- (b) for so much as was payable for works done up to the date of the land transfer.
However, the sums paid for works done after the date of the land transfer escaped stamp duty.
HMRC have accepted that these same principles apply to SDLT as for stamp duty.
In a Prudential structure there is one deal but two different contracts: one contract for the land transfer and another for payment for building works carried out after the date of the land transfer. Stamp duty land tax is charged on sums paid for the acquisition of land. Any building work carried out after the land has been transferred is not subject to SDLT.
Each part of the deal must be capable of independent completion
There is no legal objection to the favourable SDLT treatment even though the land sale and the building agreement are effectively part of the same deal, and the parties would not have entered one contract without the other. There is however a requirement that the land sale is to be “completed independently” of the building contract. This means that once the land sale has completed (with ownership of the land passing to the new owner) it should not be liable to being “undone” in any way on account of the build contract. If the land sale could be “undone” then the transaction would be treated as a sale of land with completed buildings. SDLT would be charged accordingly on the total of the payments made for the land and for the works.
The following are likely to mean that the contract for the sale of the land is not sufficiently independent of the performance of the contract to do the building works:
- A provision allowing the seller to retake ownership of the land if the buyer fails to perform its side of the building contract (often seen where the seller is developing a larger site and wants to retain control of the site sold).
- A provision allowing the buyer to require the seller to buy back the land if the seller fails to perform its side of the building contract.
- A provision providing for a price reduction for the land if the seller fails to perform its side of the building contract.
The position is not so clear if the seller takes a legal charge on the land from the buyer to secure payment by the buyer of the sums due under the build contract.
Any deal needs to comply with public procurement rules
When it comes to dealing with and developing land with developers, local authorities (and indeed all contracting authorities) need to consider the applicability of the public procurement rules. A development arrangement will typically involve the purchase of land and the purchase of development works. Whilst contracts for the purchase of land are exempt from the Public Contracts Regulations 2015 as amended (“PCR”), contracts for the purchase of development works are not and will be subject to the full PCR regime on the basis that they are “public works contracts” (where the relevant threshold and other public contract requirements are met).
Where the contract is a “public works contract”, there is an exception in PCR which allows authorities to negotiate a contract directly with an economic operator, without prior advertisement, where the works can be supplied only by a particular economic operator due to the protection of exclusive rights – Regulation 32(2)(b)(iii).
“Exclusive rights” can include land ownership and so this exception would in principle apply to a scenario where an authority is looking to develop a specific piece of land (being the only viable piece of land), which is owned by an operator who is not willing to simply sell the land in order for the authority to develop it in accordance with the full PCR regime. In these circumstances, it may be that the authority has no option but to procure that operator on an exclusive rights basis to carry out the relevant development works.
Provided the authority is confident that its exclusive rights argument is robust and therefore that the exception in Regulation 32(2)(b)(iii) applies, the structure of the arrangement in contractual terms should not make any difference as to how a court would look at the arrangement in the event it were challenged. This is because a court would look at the reality of the arrangement and the basis upon which the authority has contracted with the land owner i.e. on the basis of exclusive rights.
Having said that, a separate land contract and construction contract may due to its presentation be more likely in practice to trigger a procurement from the market and so whilst in SDLT terms it is better to have separate contracts, authorities need to bear in mind the way this might be viewed by the market.
The correct buy and build structure can save money and red tape
It is possible, in suitable cases, for local authorities buying a site from a developer both to achieve efficiencies for SDLT and to be able to proceed without having to go through a full public procurement procedure in respect of the building works element. This can work well where the developer insists on the deal including them being contracted to carry out the building works, but is prepared for the land sale and building works to be documented in two contracts which (in an SDLT sense) are “capable of independent completion”. For the developer this structure may have the bonus of a cash flow advantage from the earlier sale of the freehold interest in the site.
These notes are intended for general information purposes only and do not constitute legal or professional advice. Advice should be sought before proceeding with any transaction.
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