Buying, selling and leasing property

Advice and guidance on what you should do when buying, selling and leasing property.

You should have a well thought out business case before constructing, buying or leasing more space.

New college space means new running costs, legal responsibilities and some form of capital investment most of the time. You should only develop, buy or lease new space when the facilities you already have are not appropriate.

Find out more about the principles of floor space planning and developing an estate strategy.

Site search and options appraisal

Before buying or leasing new space, you should:

• find the right premises
• decide if leasing is an acceptable option - for example, consider the limitations on capital grant support or existing secured borrowing that may apply

To do this, you will need to establish your own search criteria and should carry out a site search. While this is something that can be done in-house, it may be helpful to work with local commercial agents as they:

• will have a good understanding of the local property market
• may be aware of other “off market” opportunities

Effective practice point

The Further Education Commissioner (FEC) team sometimes come across colleges which have committed to new premises without enough research into:

• accessibility
• potential competition from other providers

This can undermine the viability and sustainability of the site and become a drain on the college’s financial performance. In some cases these commitments can take time to unwind, so comprehensive research before proceeding is always advisable.

Site search

A site search can help you understand:

• which properties are available within your area
• whether your requirements can be met

The parameters used for the site search will depend on your requirements but will typically include:

• details of the type of property you need
• the approximate size of the property
• your preferred location

Once you have carried out a thorough investigation of the market, you can produce a list of properties. It should include a description of each property as well as its:

• address
• size of the site and any existing buildings
• terms and costs, including rent, service charge and rateable value
• current ownership
• location, including proximity to public transport and use of neighbouring properties
• site plan
• existing planning use
• EPC rating
• market commentary

Doing this will provide a detailed insight into the market for the type of property in question. At this point you should assess whether the available properties meet your criteria, especially in relation to cost. If they do, you should undertake an options appraisal.

Options appraisal

An options appraisal will allow you to compare several properties against one another, using a set of key evaluation metrics. Each property is then given a score for each metric to show how well it meets the requirements.

This will help you to:

• see which property is best suited to your needs
• rank the properties for consideration by governors

The criteria used to assess properties will depend on your specific requirements. They may include consideration of:

Size

Assess whether the property is the right size for your requirements. If it is smaller than planned, can you still operate from the property effectively? If it is too large, is there scope to sub-let additional space?

Location

You should check the suitability and quality of a site’s location. How will staff and learners get to the site? Is there good public transport and parking? Are there any neighbouring property uses which could be helpful or problematic?

Cost

Assess the total cost of the property. Is the rent reasonable and affordable? What other costs will you have to incur? For example, consider service charge and rates, modifications and fit-out. What are the anticipated running costs of the property?

Planning risk

Are you able to use the property with its existing planning use designation or will you require a change of use application? Consider both the risk and the costs of this.

Technical risk

Is the property in good condition and suitable for your needs? If you will need to undertake fit-out or refurbishment works, what is the cost of these?

Deliverability

Check how easily the property could be leased and made suitable for your requirements. For example, is the property accessible for learners with a disability?

A property is more likely to be a good choice if it is already being used for what you need it for. A property that requires work and is currently let to a third party would be more difficult to make work.

Flexibility

How long will you commit to the property and how simple will it be to exit the facility if this proves necessary? For example:

• potential sale for alternative use
• sub-letting (if a purchased property)
• risk of dilapidations or reinstatement costs (if a leased property)

Managing public money

If any aspects of the site choice are likely to be novel, contentious or repercussive transaction in terms of the use of public money or reputation of the college and its learners, then refer to Managing public money. If there is any doubt, you should consult with the Department for Education before proceeding.

Case study: Trafford Colleges Group (TCG)

To prepare for the merger with Stockport College, Trafford Colleges Group completed an options appraisal. They did this to test the case for relocation of most provision from the main Stockport campus against 3 alternative options. The options included:

• do nothing
• relocate to an alternative site
• complete major building works on the existing site

This resulted in a change of plan in favour of a solution that avoided a split campus and retained the existing site.

Read more about how Trafford Colleges Group and Stockport College managed their new merged estates.

Buying property

Buying property can be a time consuming, complicated, and expensive process. Whether you’re looking to expand your existing site or move to new premises, there are various things you should consider.

Pros and cons of buying

You should have a clear purpose for buying a new property. Reasons could include:

• a need to expand the existing provision
• to allow for a new curriculum area to be established
• a combination of both reasons

Once you have established the core purpose of the purchase, you should consider whether buying a property is the right approach for you, or leasing property would be more suitable.

When considering whether to buy (or lease) property, it is important that you consider:

• the location, including proximity to existing college facilities, students, staff and whether the property needs to be on a campus or can be remote
• the type of property, including whether there are existing buildings which would need renovation
• whether freehold or leasehold is better, depending on your plans
• if there is space for future expansion if needed
• how flexible the space is, if less space is needed in the future
• how long you intend to hold the property
• how the purchase will be financed and if there are any tax implications
• if your existing estate can be reconfigured instead of purchasing new land or buildings
• the likely running costs of any new property
• how sustainable the purchase will be
• how any needed works will be funded
• whether buying (or leasing) the property represents good value for money
• whether any changes are likely to be novel, contentious or repercussive as set out in Managing public money

Effective practice point

Property is expensive to trade and there is always a risk of wasting money.

You should make sure that as a college you:

• are clear on the purpose of the purchase
• work with an acquisition agent who can provide expert advice, as well as saving you time and money

When following this approach, it is important to provide a clear scope of works to the agent, so that all parties are clear what is expected of them.

Valuing property

When considering the value of a property, it is common for worth and value to be used interchangeably. However, there is a subtle difference between the 2 terms.

For example, when purchasing a site, a marketing agent may guide its value. However, its worth may be considerably more to you than the value at which it has been marketed. Were a site to be listed on the market close to your existing college campus, it may be more valuable to you than to other potential buyers.

The difference between value in the open market and worth to a specific investor is clarified within the RICS Valuation Global Standards, commonly known as the Red Book. The Red Book contains mandatory rules, best practice guidance and related commentary for all members undertaking asset valuations.

There are a range of definitions of value, with the most common being:

• market value - the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

• market rent - the estimated amount for which an interest in real property should be leased on the valuation date between a willing lessor and willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion

Whilst a valuation most commonly provides the estimates for an asset, other bases of value can be specified.

It’s recommended that you appoint RICS-qualified valuers to undertake any valuation work using the Red Book. When appointing a valuer it is important that you ensure they have the necessary expertise and experience to value the subject asset, alongside an understanding to the purpose of the valuation.

A valuation may be required for the following reasons:

• supporting a purchase
• informing rental values
• financial reporting
• tax assessments
• insurance
• legal requirements
• compulsory purchase and compensation

The Red Book relates to all written valuations which are provided by RICS members who are registered valuers. However, there are examples where written valuations may not comply with the Red Book standards. A broker’s opinion of value to support an acquisition or disposal would not follow the Red Book standards.

As part of producing a written valuation, you will be required to agree terms of engagement with the valuer. The terms should set out the:

• basic facts of the valuation
• scope and depth of the service to be provided

Having agreed terms of engagement is a fundamental requirement of the Red Book. The majority of valuation firms will have their own standard terms of engagement. RICS has its own framework for terms which will provide you with an idea of what is needed.

Effective practice point

A valuation will largely depend on the specific assumptions which are made to support it. These assumptions can lead to a range of values being provided, rather than a precise figure.

You should:

• check that the assumptions are realistic
• remember that value is linked to demand which can change quickly

Heads of terms

A heads of terms document sets out the main terms of a commercial agreement reached between parties in a transaction. The landlord’s or seller’s agent typically prepares these. Whilst the document is not legally binding, it details the formal agreement which has been reached. For a freehold acquisition, the heads of terms document will include:

• details of the parties involved
• the address of the property
• the agreed price and how it is to be paid
• exchange and completion dates, alongside any conditions which need to be satisfied to allow for the exchange and completion to take place

Effective practice point

Heads of terms are not legally binding and are normally issued subject to contract. It is always beneficial, however, to include as much detail as possible within the terms. This is to minimise disagreements once solicitors are instructed. This will help to save both time and professional fees as part of the process.

Deal structures

There are different types of purchase agreements available. These will relate to the nature of the purchase and intended use of your proposed site or property. The main types of contract most prevalent within commercial property are:

• Conditional contracts: these include specific conditions that must be met for the exchange of contracts to occur – without them they are under no legal obligation to exchange them
• Unconditional contracts: parties are legally obligated to exchange contracts with no conditions – for example, buying a property at an auction
• Option agreements: do not commit the buyer to proceed with a purchase, but rather grant the buyer an option to buy a property for a specified time and an option fee.

Due diligence and instructing solicitors

Once the heads of terms are agreed, they can be shared with solicitors who will begin the process of drafting contracts or leases. If an agent has been appointed, they would typically share the terms with solicitors. You should make sure that any plans that are going to be appended to legal agreements are accurate and prepared in advance of the issue of draft legal documents.

The more specialist the property acquisition, the more professional advice is needed. This will have an impact on both the professional staff involved and the likely legal fee.

When considering specialist properties, remember the requirement to seek permission from the Department of Education in advance if planning to purchase a property which may represent a novel, contentious or repercussive transaction as referred to in Managing public money.

Contracts

In property transactions, legal advisers tend to prepare contracts. These contracts commit the parties to the transaction, allowing for completion to follow. The buyer and the seller will each sign an identical copy of the contract, which is then exchanged between them.

After the exchange of contracts, legal advisers will prepare the transfer (usually a form TR1), transferring the property to the buyer. In the case of a leasehold transaction, both parties will need to approve the creation of a new lease. The parties will then sign the deed or lease. Completion takes place when the transfer is dated and the purchase price is paid. On completion you should ensure that there is an asset management plan in place. This is to manage any handover of building information and record details linked to the transaction.

Following completion your legal advisers will be able to confirm if there is a need for the transaction to be registered at HM Land Registry.

Effective practice point

When buying a property, you should consider how you are going to manage it and integrate it into your existing estate management systems. A lot of details about the services, maintenance and operation of the property and its plant should be available from the vendor. Make sure you gather all available information during the transaction. If possible, try to arrange an in-person handover so that you can gain an understanding of how to operate and manage the property.

Tax implications

When acquiring or disposing of property, you need to make sure that you understand the tax consequences of the transaction. However, these rules are subject to change. You should consider whether you need to take advice to ensure compliance relevant to your specific transaction. Check that the advice does not conflict with the requirements regarding tax planning in section 5.6 of Managing public money.

Stamp Duty Land Tax

Purchases of UK property are subject to Stamp Duty Land Tax (SDLT) if situated in England, Wales, or Northern Ireland. You pay SDLT on increasing portions of the property price (or ‘consideration’) when you pay £150,000 or more for non-residential or mixed-use land or property. Depending on the particulars of the purchase, colleges (which are charities), should be able to claim exemption from this when buying a freehold, but take specialist advice if you are in doubt.

Value Added Tax

You can find general principles relating to VAT on property transactions in the section on financing the estates strategy.

Effective practice point

Commercial property taxation is complicated and whilst we have listed the key areas of taxation, it may be helpful to consult an expert tax adviser who will be able to confirm what taxes are applicable to your specific transaction. It is important to note that late payment or missed payments of tax can lead to a fixed penalty fine, prosecution and even imprisonment.

Leasing property

Leasing commercial property can be a good solution for colleges requiring additional space.

Leasing typically:

• provides a more flexible form of ownership than freehold ownership
• does not usually need as much up-front expense

It can be harder for colleges to secure capital grants for works to leased properties, especially if a lease has a remaining term of 25 years or less.

Before leasing or buying land or property, you should undertake a site search and options appraisal. Once you are satisfied that a site meets your criteria, there are some stages that a typical leasing transaction follows.

Leases are complex legal documents and tend to contain:

• restrictions about how a property can be used
• obligations about how the property is maintained

You should:

• understand what to consider before leasing property
• consider seeking professional advice when negotiating the terms of a lease
• make sure that any action or advice does not conflict with the requirements on tax planning in section 5.6 of Managing public money

Making an offer

An offer for leasehold property is usually made to the landlord’s agent. This should be in writing and should at least include the:

• rent including any suggested rent-free period
• term of the lease
• use of the property

You should mark your offer as “subject to contract” to show that the final agreement has not yet been reached. It shows that it should not be considered a final, binding agreement.

If you can reach a broad agreement on these main points, the parties will start to negotiate heads of terms.

Agree the lease (heads of terms)

The head of terms document will set out the main lease agreement points agreed between the landlord and the tenant.

The landlord or their agent will usually produce the first draft.

While the level of rent and the length of the lease may be agreed at the offer stage, the heads of terms should also include:

• repair obligations
• rent review provisions
• break clauses

Heads of terms often take some time to negotiate between the landlord and the tenant.

Heads of terms should always be marked “subject to contract”. It shows that they should not be considered a final, binding agreement.

There is more information about heads of terms in our heads of terms template and the code for leasing business premises from RICS.

While the precise content of any set of heads of terms will vary, they should typically include the following.

Details about the landlord

The name and address of the landlord, their agent, and solicitors, along with their contact information.

Details about the tenant

The name and address of the tenant, their agent, and solicitors, along with their contact information.

The property

The address and a detailed description of the property. This should include:

• the measured area of the property
• a lease plan
• details of any additional rights, such as rights of way, parking spaces or access

Rent

The amount of rent per annum and details of when rent is payable. This should also indicate whether VAT will be chargeable on rent.

Rent-free period

Details of any rent-free period or other incentive agreed between the parties.

Lease term

The period of time for which the property is being leased. This should also include details of any break clause agreed between the parties and the timings and mechanisms for it.

Rent review

Details of:

• when the rent is to be reviewed
• how the new rent will be assessed
• what happens if the parties cannot agree on a revised rent

Service charge

If the property is part of a wider estate, a service charge may be payable. Details should be provided as to the proportion of service charge payable and likely annual charge.

Repair

Details of who is responsible for repair of the property. This may specify that part of the property, such as the structure, remains the responsibility of the landlord, while the tenant must maintain the interior of the property.

If a property is not in a good state of repair, it is advisable for tenants to document this with a photographic schedule of condition.

Use of the property

Details of what the property can be used for. This may refer to a particular planning use class.

Alterations

Provides details of what:

• alterations the landlord will permit
• permissions are needed before works are commenced

Alienation

Explains if and how the tenant may share or assign part or the whole of the property with any other party. If sharing or assignment is permitted, the terms and conditions for such an arrangement should be provided.

Deposit

If a rent deposit is payable, the heads of terms should specify:

• the amount of deposit required
• the reason for holding a deposit
• how long it will be held
• the conditions attached to its return

Costs

Specifies which party will pay for the legal costs associated with the transaction. Typically, each party will pay its own costs.

Security of tenure

Details of whether the lease is to be granted within the security of tenure provisions of the Landlord and Tenant Act 1954.

Conditions

A list of what conditions must be met for completion of the lease to occur. This may include the granting of planning permission, board approval or a satisfactory survey.

Finalising the lease

Once heads of terms are agreed, you should instruct solicitors to draft and finalise the lease documentation.

Once both parties are content with the leases, and any conditions have been satisfied, the lease can be completed.

If the lease is for a term exceeding 7 years, it should be registered with HM Land Registry and will be assigned a title number.

Effective practice point

Good record keeping is important when dealing with matters affecting a leased property. This can include alterations or repair. By keeping all of the relevant documents relating to a tenancy safe, you can be sure that you have an accurate record of any permissions, works and agreements relating to the property. This will help you to manage the tenancy effectively and should prove valuable should any disputes arise.

Leases and taxation

Stamp duty

As with the purchase of freehold property, leasehold property can incur stamp duty land tax (SDLT). For leases, the level of SDLT will depend on the:

• size of any lease premium payable
• level of rent payable over the term

You can see how much stamp duty you will need to pay using the Stamp Duty Land Tax Calculator.

Colleges, which are all charities, should be able to claim exemption from stamp duty when being granted a new lease. You may still want to take specialist advice, however.

Opting to tax land and buildings

Supplies of land and buildings, including leasing or renting, are normally exempt from VAT. But you can opt to tax land using a VAT notice 742A. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You do not need to own the land in order to opt to tax.

If you decide to opt to tax land or buildings, you should consult with the Department of Education before proceeding, as it may be considered to be a novel transaction.

If your college leases land or buildings which are subject to a current option to tax, then VAT on the lease will be charged to you.

If your college leases out land or buildings, you should check for a prior option to tax being exercised on the asset. If one has been made previously (it is possible to revoke options to tax after 20 years) you are required to charge VAT on the lease charge.

Selling property

As with buying property, selling property can be a complicated process. If you are considering disposing of land or property forming part of your college estate, there are some things to consider.

Managing public money states:

Each organisation needs to devise an appropriate asset management strategy to define how it acquires, maintains, tracks, deploys and disposes of the various kinds of assets it uses.

Property transactions and good governance

College leaders have a responsibility to act with integrity to safeguard the value of the college’s assets.

The purchase or sale of assets should be handled:

• with appropriate due diligence
• in line with the principles of public life
• in compliance with the college’s financial regulations
• with regard to obtaining value for money, as set out in Managing public money
• as part of an annually updated asset management strategy, which could be presented in the form of a summary report to governors, or as a section of annually approved financial regulations, as set out in asset management strategy

Guidance on governance issued by the Department for Education sets out board responsibilities on managing estate transactions. It requires that decisions on estate matters are:

• made in the interests of your corporation, including getting the best possible deal in property transactions
• supported by information, such as written professional valuations

In addition, Managing public money stipulates that any planned activity which might represent a novel, contentious or repercussive transaction needs to be referred to the Department for Education for permission before proceeding.

Keep these overriding principles in mind when engaging in property transactions or deals. Make sure that you have the right evidence to support the value that you secure for the college. This should include the probity of underpinning processes. For example, sale transactions will need to comply with the college’s own financial regulations as well as any relevant requirements of the Charity Commission and the regulator (Department for Education).

Review your estate

Disposing of land and property is a big decision and one not to be taken lightly.

The identification of surplus land is the responsibility of your senior leaders. They should adopt an estate strategy which keeps all land holdings under review.

Consider whether all of your assets are:

• contributing to the aims of your estates strategy
• delivering for your students and stakeholders

If your review identifies that you have more land and buildings than needed to support your long-term strategic plan, you may consider selling them. This can release capital for reinvestment in your future provision. It is important when planning disposals that you ringfence any net proceeds from the sale of capital assets for use in future capital investment. You cannot use net proceeds from capital sales to support working capital or ordinary cash flows of the college without first obtaining formal permission via the Department for Education. “Net proceeds” for these purposes are the sale proceeds after any finance secured on the property has been discharged.

Methods of sale

When choosing a disposal strategy you should consider the:

• governance – decisions are made in the interests of your corporation and supported by information, such as written professional valuations
• timing – identifying a desired disposal time and an estimate of lead times required
• pricing – take valuation and agency advice to establish the likely realisation value
• minor works – could timing and price be improved by undertaking any minor works to the subject property?
• disposal method – is private treaty, tender, auction or another method more appropriate?
• marketing – what marketing and advertising avenues are available?
• impact – consider the impact on the local (and general) property market if you are placing a large number of properties on the market at the same time or in close succession
• conditions – consider whether you need to sell the land under certain conditions (for example, in a certain timeframe), which may impact on the price
• team – ensure the project team understands the disposal strategy and maintains the momentum to complete the process

Effective practice point

You should take advice from your selling agents when you are evaluating how to dispose of land. You should seek their advice on the most appropriate disposal route, cost and lead times.

You will get the best deal for your college by selecting the most appropriate method of sale.

Methods of sale

When planning a sale, remember that Managing public money stipulates that any planned activity which might represent a novel, contentious or repercussive transaction needs to be reported to the Department for Education for permission before proceeding with the sale. It is possible that anything other than a conventional sale by an agent would be regarded as novel or repercussive and you should check if in doubt.

Auction

Auctions are typically used when a seller wants to dispose of a property quickly. Auctions have fixed timescales for exchange and completion.

When preparing for a disposal by auction the conditions of sale should be published with the auction prospectus. Auctions are sometimes the preferred method of sale used for unusual properties which are hard to value or market.

It is vital that the auction is advertised well, and that the property is put on the market prior to the auction. Think about how you would demonstrate this to show value for money.

Private treaty

This is the method most widely used in the UK. Sellers make it known that a property is for sale, usually through estate agents who circulate particulars of the property to potential purchasers. Once a potential purchaser has expressed an interest, terms of sale are negotiated.

You should ensure that the property is publicly on the market throughout the process to ensure genuine competition.

Informal tender

This method is similar to a private treaty sale, except that the land is marketed for a set period of time. This allows the vendor to look at different bids simultaneously and make a judgement as to which bid to accept.

In an informal tender, bids are usually invited from selected parties, subject to contract. Bids can also be invited publicly. The seller is not usually obliged to accept the highest, or any, bid.

Formal tender

In a formal tender the contract terms are sent out with the sales information. Prospective buyers will have to sign and return the entire document, including the conditions of sale, and often with a deposit enclosed. The vendor then normally has a set period within which to decide on the bids received. Once a bid is accepted and the deposit banked, a contract has been made.

Unless the market is very strong for the property on offer, the number of bids likely to be received will generally be fewer than if the property was offered by way of informal tender or private treaty.

Sale and leaseback

Another type of lease transaction that sometimes plays a part of estates management is a sale-and-leaseback transaction. This transaction is a way of using your estate to provide a financing method to release cash for your operations.

It involves your college selling its freehold interest in its estate or property to a purchaser and simultaneously completing a contract to lease it back. The college would continue to operate from the estate or property but would benefit from an initial cash injection. This can happen whilst also being subject to rent payments and tenant responsibilities. The lease terms are typically granted over a long term, for example 20 to 30 years.

This type of transaction is common in the private sector but is far less common in the education sector and should be considered with caution. The main risks to consider are:

• whether the transaction is a good use of your assets
• if it is in the best interests of the educational provision of the college
• the necessary relinquishment of the estate or property involved in the transaction
• the need for regular cash outflows in rent over an extended period of time
• whether the proposed transaction is a “novel” financing method as defined by the Further education reclassification: government response, in which case it will need permission from HM Treasury via the Department for Education to proceed

These outflows are effectively your repayments for the upfront cash you have received for your asset. You need to check how the lease payments are structured and whether they are linked to Retail Price Index (RPI) inflation or subject to other index linking. As with other financing methods, you need to consider affordability over such a long period. How would you afford cash payments if your cash flows deteriorated, or the lease payments increased?

You also need to understand what happens at the end of the proposed leaseback term. It is common for the seller to include provisions to allow for an option to repurchase, but this would need to be clear in the agreement at the outset.

Before taking forward any proposal for sale and leaseback, careful consideration will also need to be given to:

• the limitations this may create on how the property assets are used by the college
• how this may limit the potential to secure funding for future improvements and condition works

There are instances where college sale and leaseback transactions have needed to be unwound. This can be both time consuming and potentially very costly. Whilst the initial cash injection provided may be attractive, there are risks attached to committing to this kind of arrangement. Colleges should take care to take good legal, tax and financial advice to evidence their governance decisions on this option.

Appointing an agent

The involvement of an agent can help to:

• avoid protracted negotiations
• ensure that best practice is followed

A real estate agent will act on your behalf and will be appointed under a contractual arrangement. It is important that you agree a suitable scope of works and ensure that the duties are detailed within an appointment letter and terms of engagement.

When appointing an agent, you should keep in mind your existing framework agreements. It is not always necessary to carry out a formal tender process. If agents are invited to tender, your procurement lead should ensure that the process follows the college’s own procurement rules.

Planning

Sometimes it can be beneficial for colleges to obtain planning permission for land or property before they sell it.

The general role of town planning and its impact on the college estate has been discussed in this guide.

Obtaining pre-application advice from your Local Planning Authority is not compulsory. It does, however, offer significant potential to improve both the efficiency and effectiveness of a disposal process. Development outcomes are generally better if you engage early on with the planning system.

The approach needs to be tailored to the specific site and the issues to be addressed. There are expectations and processes to follow before submitting an application. The engagement can provide you with a clear, timely, and reliable view on the merits of the development options for the property.

Capturing future uplift in value (overage and clawback)

An overage clause allows the seller to benefit from any substantial uplift in value on a specific event occurring after a sale has completed, such as the implementation of a satisfactory planning permission.

For example, you dispose of a plot of land with development potential but without planning permission. The buyer goes on to achieve planning permission, increasing the value of the plot. Under an overage agreement which covers these circumstances, you may be entitled to a further payment. This payment will likely be based on a percentage of increased value.

Whilst an overage agreement can be formed in a number of ways, the essential elements are as follows:

• the duration of the agreement
• what events need to take place for the overage to be triggered
• how the overage is to be calculated
• how the seller will secure the overage agreement
• how any overage will be paid between parties once it is secured

Clawback refers to claims for all or part of windfall gains resulting from, for example, the buyer obtaining planning permission for a change of use. Another example is a greater volume of development than anticipated by the planning permission obtained prior to disposal.

Examples of where overage and clawback are used might include:

• where it is difficult to gauge the commercial potential of a property
• where a particular type of purchaser may have a better chance of obtaining consent for a development than the college
• where a developer can improve upon a planning permission obtained by the college
• the disposal of a listed building

Effective practice point

Both overage and clawback provisions can be difficult to enforce. A key element of this is the difficulty in reviewing the value of a property when it no longer belongs to you. Issues can also arise when parties look to agree the increase in value that is due when the agreed event has taken place.

Contractual provisions can be used to attempt to enforce the payment of the uplift in value. Overage or clawback clauses are specialised and may give rise to complex legal issues. There could also be significant implications for taxation. You should therefore seek appropriate legal and tax advice at the outset to determine the best way to proceed, as long as such advice does not conflict with the requirements regarding tax planning set out in section 5.6 of Managing public money.

Any proposed overage agreement is likely to represent a novel, contentious or repercussive transaction and will therefore require permission from the Department for Education before proceeding. However, a proposed overage agreement which represents good value for money and is not reputationally impactive could secure the Department’s consent reasonably swiftly.

Tax implications

When acquiring or disposing of property you need to make sure that you understand the tax consequences of the transaction. However, these rules are subject to change and you should consider whether you need to take advice to ensure they are relevant to your specific transaction. Make sure the advice you receive does not conflict with the tax planning requirements set out in section 5.6 of Managing public money.

Value Added Tax

You can find general principles relating to VAT on disposals in the section on financing the estates strategy.

Heads of terms and contracts

The buying property section has more information on effective practice when drawing up heads of terms or contracts when selling property.

What governors need to know

The Department for Education has published a FE and sixth-form college corporations: governance guide which gives advice on your responsibilities and best practice for governance teams. It contains a section on finance and estates management which underpins the advice in this guide.

Property acquisition and disposal transactions are legally binding. As governors and senior leaders, you need to be mindful of your fiduciary and legal obligations when conducting property transactions. This also applies when dealing with long-term property leases.

Rationale and business case for property transactions

It is important to ensure you have a clear rationale and properly tested business case for acquiring or disposing of property assets.

As governors, you should:

• understand the main drivers behind decisions to acquire or sell property and ensure this aligns with your approved estates strategy
• make sure that the financial implications of property transactions have been properly assessed – for example how a property acquisition will be financed
• check that your college produces an annually updated asset management strategy, which could be part of a review of the whole estates strategy
• be aware of the requirements of Managing public money

Assessment and appraisal of options

Rushed or poorly researched property acquisitions and disposals can result in poor value for money and sub-optimal solutions. This can lead to a lasting legacy of issues and problems.

As governors, you should:

• expect that proposals for property acquisitions or disposals are brought forward in sufficient time to allow for careful consideration and exploration of alternative options by the board
• be clear about the respective roles and responsibilities of the board and executive for taking decisions on property acquisitions and disposals – completion of which typically involves the use of the college seal

Appropriate external professional advice and support

Property acquisitions and disposals can be significant and complex transactions.

As governors, you should look for assurances that appropriate external professional advice has been sought. This may include legal input, but also where appropriate specialist advice including aspects such as property valuations and complex taxation issues.

Securing value for money and ensuring compliance with due process

Financial regulations, instruments and articles and other policy documents should set out clear rules and protocols for safeguarding all college assets and promoting value for money.

As governors, you should:

• be aware of the requirements of Managing public money, including the need to gain permission from the Treasury via the Department for Education before entering into any novel, contentious or repercussive transactions
• be satisfied that all property acquisitions and disposals represent value for money and that clear evidence of this is on file
• seek assurance that all transactions are conducted in accordance with college policies and procedures
• make sure that net proceeds from the sale of capital assets are ringfenced for future capital expenditure, and reported clearly in financial statements. For these purposes, “net proceeds” means the money received for the sale after any finance secured on the property has been discharged
• take proper account of the potential timelines and obstacles to achieve a property sale and avoid over-reliance on any associated capital receipts to underpin solvency