Pros and cons of promotion or option agreements for landowners and developers
The Government’s determination to boost the supply of homes across the country is ensuring more landowners and developers are increasingly seeking to promote sites for residential development.
Here at Newmanor Law, we work regularly with both landowners and developers, looking at both sides of the development process and regularly assessing the relative merits of the parties entering a promotion or option agreement.
The regularity with which the issue crops up however, makes the choice no less tricky as every potential deal is unique and both have their strong points depending on the circumstances.
In simple terms
First let’s look at the simple difference between the two. A promotion agreement, requires the promoter to obtain all the necessary planning permissions for the development of the land, which is then sold on, with the promoter sharing the profits of the sale with the original land owner.
Similarly, with an option agreement, a developer tries to obtain planning permission for development of the land on behalf of the owner, but once permission is granted, they have the right to purchase the land at a price agreed previously, which is below open market value.
In both situations, if planning permission is not granted, the landowner will not cover the costs of the promoter or developer in trying to achieve planning consent, however many attempts they make.
Considerations for landowners
Whilst there is no simple right or wrong answer when deciding which approach to pursue, a landowner needs to consider a number of issues to enable them to make an informed choice.
A promotion agreement typically plays to the strengths of the developer, who will utilise their skills and often local knowledge to promote the land and its development in the context of the local development framework plan.
Once planning permission is secured, for a development project agreed in advance with the landowner, the land can then be promoted for sale on the open market.
This arrangement gives the landowner and developer the same objective, working together to achieve the maximum profit. Promotion agreements also offer a greater certainty of achieving a sale and often in a shorter timeframe.
A promotion agreement is the likely choice when the development site is quite substantial. But this also ensures the necessary agreement documentation is more complex, needing more negotiation time and therefor higher legal fees – which will be repaid to the promoter after the land sale.
The value of the land is set when the option agreement is signed, which is before the increase in value that usually follows the award of planning permission, with the developer driving the sale price as high as possible on the open market.
This may encourage a developer to hold the land (subject to the agreed time limit) until the economic conditions are favourable for an application for planning permission – then exercise the option to buy for maximum reward.
In some cases further planning permissions might be gained after the option has been exercised, and so overage provisions might be included in the original agreement to take account of rises in value when a developer gains planning permission in stages, for example.
Option agreements can put the developer and landowner on opposite sides of the negotiating process regarding purchase price and the level at which any overage payments will be triggered.
The negotiation process is still a challenge relished by parties on both sides, but the partnership approach of the promotion agreement is increasingly the preferred choice for those who are willing to share rewards in return for effort expended.
Planning obligations, also known as Section 106 Agreements or ‘planning gain’, are used to mitigate the impact of a development by making local improvements, effect option and promotion agreements differently.
With a promotion agreement, the promotor or developer is incentivised to try and keep any obligations to the Local Authority to a minimum, to maximise the overall profit to be shared between them and the land owner.
Under an option agreement, the promotor or developer will reduce the price paid for the land by the amount of planning gain to be paid (in cash or kind) to the granting Authority.
An experienced developer can sometimes fulfil the planning obligations for less than the drop in price of the land they negotiated with the owner, to ensure an additional bonus uplift in profit.
Shared risk delivers shared rewards
For landowners looking to maximise their profits from land, working with an experienced developer is key and in the current economic climate, working with a promotor or developer you can trust to maximise profit for all parties is the best option of all.
It is often argued the landowner’s interests are best served by a promotion agreement and the promoter benefits most from an option agreement. But the lines are very blurred these days and the best deal for all parties is typically achieved through negotiation, with a view to sharing the rewards.
There are a string of important first steps before entering into either a promotion or option agreement and as you might expect, a conversation with an experienced real estate lawyer and tax adviser is the best starting point.
Here at Newmanor Law, we have the experienced real estate lawyers you need to talk to before putting pen to any agreement, so whether you have land to sell or wish to develop a site, please contact Karen Mason on +44 (0)20 7464 4081 or email firstname.lastname@example.org