The Disposal of Surplus Property


The majority of public sector organisations are now under obligations to review their property portfolios and, subject to detailed detailed sector-specific guidance, dispose of surplus property. On 8th June 2011, Grant Shapps, Minister of State for Housing and Local Government announced proposals to accelerate plans to release surplus public sector land for development.

In the NHS, Estatecode provides that only land and property required to enable NHS organisations to fulfill their function of healthcare provider should be retained. Surplus property should be identified and, subject to a number of procedural steps, disposed of. On 5th October 2011, the Department of Health issued its disposal strategy for the development of surplus NHS property for housing.

Many local authorities are responding to central Government funding cuts by accelerating disposals of surplus property and other sectors, such as the military or further education bodies, are subject to their own guidance. In the third sector, the Government has indicated its support for proposals to amend the Charities Act 1993 to make disposal of surplus property by charities easier.

It is, however, not only public sector organisations that need to continually review their property holdings to identify surplus property. Private sector companies should carry out the same exercise and consider the business case for disposing of property that is no longer of any use to the organisation and is unlikely to be in the future or which provides only a benefit that is disproportionate to the opportunity cost of the capital tied up in the property. The disposal of surplus property can also be a useful method for companies to reduce their borrowings.

Any public sector organisation will be under an obligation to achieve best or market value for any surplus property that it disposes of. That will also be the rational objective in the private sector. In order to achieve the best sale figure and before that, to properly assess the likelihood of and business case for disposal, the disposing organisation should carry out early due diligence on land identified as surplus. In particular, it should consider the following legal issues which have the potential to prohibit disposal or influence the sale price.

Reviewing the Title

Once surplus property has been identified and a prima facie business case made for its disposal it can be prudent to carry out a review of the title to the property to identify whether there are any title issues which may impact upon the disposal process. By identifying these issues early on in the process it may be possible to increase the value of the property once it is placed on the market.

Unregistered Land

The proportion of unregistered land in England and Wales is declining but organisations with large property holdings where changes of ownership have been rare are particularly likely to own unregistered land. If the property identified for disposal is unregistered then it is important that the title deeds are located as soon as possible and checked for evidence of the organisation’s title. It will usually be advisable to make a voluntary application to register the property before it is put on the market to make the sale process quicker and easier for buyer and seller and to highlight any title issues.

Restrictive Covenants

The property may be subject to restrictive covenants which limit or restrict the use of the property or the extent to which development can be carried out on it. Whether these are a concern will depend upon the likely use of the property following disposal, but often in the case of surplus property the property will be sold for re-development. A restrictive covenant against a certain type of development may have a significant adverse effect on the land value.

It is possible to apply to the Lands Tribunal under section 84 of the Law of Property Act 1925 for the release or modification of restrictive covenants in some circumstances. This can be a time consuming process and it is usually better undertaken before the property is placed on the open market. Alternatively, it is often possible to obtain restrictive covenant indemnity insurance against future losses for breach of a restrictive covenant and a policy put in place with an adequate limit of indemnity cover will satisfy most purchasers.

In relation to all restrictive covenants it is very important that no negotiations are carried out, prior to receiving legal advice, with any adjoining or nearby owners who may have or claim to have the benefit of the relevant covenant. If negotiations do take place then it could materially prejudice the disposing organisation’s ability to place insurance cover against breach of the covenant.

Ransom Strips

It is crucial if the property is to achieve full value on the open market that it has adequate access rights. If development is anticipated then access may need to be by a different route than that used historically, either because of a physical aspect of or defect with the existing access or for planning purposes or as a consequence of intensification of use. By whichever route access is obtained a title review should be carried out to establish whether any ransom strips are present.

A ransom strip is an area of land which is owned by someone other than the disposing organisation. If access is only possible via a ransom strip then the person with title to that strip will hold the key to unlocking the development potential of the land. It will generally be sensible to resolve ransom strip issues prior to offering the property to the open market and that may involve payment to the ransom strip owner, either in return for a formal right of way or transfer of ownership of the strip. The conventional approach to valuing ransom strips has been to offer the ransom owner one-third of the uplift in value of the property released by unlocking it for development. However, any agreement will ultimately depend on market conditions and the specifics of the property and its locality.

Rights of Way and other easements

It is important to establish the nature of any easements benefitting the Property, so that any that are missing can be addressed, if possible. As well as access rights, the property may benefit from rights to run services over adjoining land, rights to light, rights of support or other property specific rights. It is also useful to check whether the property is subject to any rights which might adversely affect the proposed disposal and subsequent development, for example, public or private rights of way or rights of support.

It will also often be the case where surplus property is being disposed of that the disposing organisation will be retaining adjoining land. In that case, the organisation will need to consider whether it needs to reserve any rights over the property being disposed of for the benefit of that adjoining land, most commonly, access to the public highway or mains utilities.

Facilitating the Disposal Process

When the title review has been completed, there are a number of other steps that can be taken to facilitate the disposal process and maximise the value received for the surplus property. We would suggest that any disposing organisation consider the following:

  • In the public sector, always have regard to sector specific guidance or legislation governing the disposal process and seek advice on the interpretation of that as necessary. There may also be general guidelines which are applicable, for example, the Crichel Down rules which apply to most disposals by public sector bodies of property that was originally acquired using compulsory purchase or under threat of compulsory purchase. Where the rules are applicable there is an obligation to offer the property back to the original owner before it can be placed on the open market;
  • Carry out a site inspection to establish what specific issues there are on the ground, for example, drainage, boundary problems or illegal occupiers. It will also assist when instructing legal advisers or other professionals, who may only have seen the property on plans or in photographs. For some disposals it may be appropriate for the various professionals to undertake a site visit;
  • Construct a sales pack to circulate to interested parties, including title information for the property and replies to standard pre-contract enquiries. The documents referred to in pre-contract enquiries such as copy planning consents, any asbestos survey and the health and safety file for the property should also be enclosed. In the case of large disposals, consider including a full set of standard property searches.
  • Assess whether an application for a change of planning use might have the potential to increase the value of the surplus property. If the change of use is obtained by the disposing organisation it removes an element of risk and uncertainty for potential buyers, which may lead to an increase in the purchase price that they are willing to pay.
  • Consider the most appropriate pricing structure. In many cases it will be appropriate to use an overage arrangement whereby the disposing organisation receives future payments representing any uplift in value of the land once it has been developed or once it has been developed and sold on. Overage provisions and negotiations can be complex, so it would be sensible for the organisation to discuss its preferred structure with its solicitor and surveyor prior to agreeing terms for the disposal of the property. A calculation of the overage that the organisation is likely to receive and the likelihood of that sum being correct given changing market conditions will be important pieces of information in assessing the business case for disposal of the property.  

© Hempsons 2014