Cash Clinic: A nice little earner on property not always as good as it appears

A nice little earner on property not always as good as it appears

Q My family and I co-own some agricultural land that has been earmarked for the development of hundreds of private houses. We have been waiting for this to happen for several years and it seemed close when the recession put a hold on it. The company we are dealing with has the option on the land for the next seven years and we are tied in to that.

We were recently contacted by an estate agent on behalf of a trust fund and offered about 2 million for a 50 per cent stake in the deal. My siblings are very keen and I am too but I remain cautious. I know very little about business deals and wonder if you have heard of this type of thing. Are there genuine people who have so much money to invest even when they don't know what the return will be? What are the risks for us?

GS North Queensferry

A The option which you and your family have signed with the potential development company is a contract, binding on both you and the development company. I imagine it is conditional on possibly a number of matters, one of which is almost certainly detailed planning consent being granted. Normally these options contain obligations on the development company to actively pursue planning consent. You mention that the company has an option for the next seven years, and this makes me think that the company is trying to have the land zoned for housing, which can take a number of years and may not be successful.

I presume what the trust fund wishes to do is take a 50 per cent interest in the farmland and hopefully profit if and when the option is exercised. There are genuine trusts with considerable funds to invest, particularly in agricultural land. Agricultural land is one of the few property commodities which has appeared to weather the credit crunch storm. Very little farmland comes on to the open market in Scotland, and farmland with potential development value is doubly attractive.

Without seeing the option agreement in question, it is very hard for me to give any detailed advice. However, if you sell a 50 per cent interest in your farm to this trust fund it means that any decisions in the future regarding management or sale of the farmland will need to be taken jointly between your family and the fund. You may well have very different objectives and not many people wish to buy a 50 per cent interest in land. You may therefore profit immediately to the extent of the large cash sum they are offering, but suffer further down the line by losing control of the land in question.

You do not say in your letter how big the farm is.Is the sum offered what one half of the farm would be worth even without the "hope" value of development?

Or is the trust fund taking a risk that planning consent will be granted? They would not have approached you if they did not scent a profit.

I would tread very carefully and recommend taking expert legal and indeed land management advice as to whether what is being offered is sensible, possible or desirable. It may be that the option agreement prohibits you from transferring the land to a third party anyway, in which case the trust fund's interest is entirely speculative.

•Alastair Shepherd is a partner in the private client department specialising in rural and agricultural matters at HBJ Gateley Wareing

If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.