Land Banking Scams: what are they and how can you avoid getting caught?

When planning permission is granted for housing development on a plot of land, its value can increase dramatically. While agricultural land is usually worth around £15,000 per acre, sites with permission for new homes can sell for as much as £1,000,000 per acre or even more. When the returns available are so lucrative, it is understandable that there are plenty of people who want to try to benefit from that. Unfortunately, it has also resulted in unscrupulous companies and individuals operating land banking scams like this one which was recently reported in The Times.

What are landbanking scams?

There are a number of variations on these scams, but they all have the same essential characteristics.

A company buys a large piece of land and then divides it into a number of smaller plots before selling it to individual investors for inflated prices on the promise of a future uplift in values. Sales brochures often provide generic detail about the housing market and land values while making no specific claims about the development potential of the site that is for sale. The parcels of land are typically arranged around a road layout that gives the impression of a housing development site.

This is where the problems start.

Firstly, to make sure the scammer can buy the land very cheaply to begin with, they normally buy sites that have little or no development potential. This might be areas of Green Belt land or sites at risk of flooding – where national planning policy almost always prevents development.

Secondly, dividing the site into a number of smaller plots, each in a different ownership, is a very unusual way for development sites to be dealt with. It makes the eventual sale of the site very complicated – every landowner has to agree to – and sign – the sale contract. The scope for disagreement and the need for parallel negotiations with multiple owners can often put developers off. It also assumes that the council will grant planning permission for a form of development that respects those ownership boundaries – there is no guarantee of that, especially as land ownership is not a planning matter.

Thirdly, it is actually really difficult – and expensive – to secure planning permission for a site. To do so you need to be proactive – you can’t just sit back and wait. It can cost £100,000 or more to prepare all the technical information that is needed to support a planning application on sites of even a relatively modest size.

If the site needs promoting through a Local Plan process first to allow it to be identified as being suitable for development, the costs can be even higher. With a fragmented ownership structure and no overarching agreement between the owners of the various parcels, this planning work becomes difficult to fund and even harder to coordinate.

As a result, the unsuspecting investors are often left owning a small part of a site with almost no development potential whose very ownership structure is an impediment to development. In short, the plots of land are worth almost nothing.

How to avoid getting caught out

It is a truism of investing that if it seems too good to be true, it probably is. As with any investment decision, you should approach an opportunity to invest in a potential development site with a healthy dose of cynicism. Don’t take any of the seller’s claims about the site’s prospects at face value – do your own research.

Whether or not to grant planning permission is down to the local council. That decision is made based on the policies set out in their Local Plan and the accompanying proposals map, both of which can be found on the relevant council’s website. Check what the land you are being sold is designated as and what those planning policies say about development being allowed. You can check whether the site is at risk of flooding on the Flood Map for Planning website.

The planning system can be extremely complex. How particular policies should be interpreted can be based on case law or planning appeal decisions, for example, while councils also change their policies from time to time. That all might mean you don’t feel comfortable making your own assessment of the site’s development potential.

For a relatively modest charge, a planning consultant can provide you with an independent overview of a site’s development potential. To save on cost, you could even consider clubbing together with other potential buyers to jointly instruct the report. Don’t rely on any report provided by the seller – you can’t know how “independent” it really is.

There are other questions to consider too, such as how would the site be accessed, where would the drainage go and are there any ecological or contamination issues that need to be taken into account. A planning consultant can help advise on those matters too.

Don’t be pressured into making a quick decision. If the person selling you the plot of land is genuine, they will happily give you the time to do your own research.

What to do if you think you’ve been scammed

Unfortunately, many careful, intelligent people do get caught out by land banking scams. If you think you may have been a victim, here are some things you can do:

1. Take advice. Speak to a planning consultant to see whether or not your site has any development potential.
2. Contact the Financial Conduct Authority (FCA) to see if the company you bought the land off is registered with them. If they are, the FCA could take action.
3. Get in touch with The Insolvency Service, a government agency that tackles financial wrongdoing.
4. Speak to a solicitor. Take along copies of all the information you have, including correspondence and marketing material from the seller, the sale contract and any appraisal of the site ’s development potential. They can then advise on what other options you may have.
   

Our experience of dealing with development sites, combined with the number of land banking scams we have encountered over the last decade, means Longwall Property is well placed to help deal with the issues that can arise. If you have been approached about an investment opportunity and you would like a second opinion, or if you are concerned you may have been the victim of a land banking scam, get in touch and find out how we could help.