A Guide to Promotion Agreements
25 Jan 2021
Landowners with land suitable for development may consider one of the following three methods by which a landowner can approach strategic development of their land secure planning permission for development on land they own.
Go it alone
The first and simplest is for the landowner to secure planning without any involvement from any other parties. This is the cheapest option, however, a landowner may not have the necessary expertise, the necessary funds or time to pursue a planning application.
The landowner may not want to take the risk or incur any wasted costs in the event that a planning application is not successful or does not result in a satisfactory planning consent.
The lack of alignment of the parties under an option agreement is one of the main reasons why promotion agreements are becoming increasingly fashionable. A promoter (usually a developer or planning specialist) will submit a planning application on behalf of a landowner, with a view to securing a satisfactory planning permission. A promoter will be responsible for the costs associated with the planning process and once a planning permission is granted, a promoter will implement and fund a marketing strategy for the sale of the land.
It is only when a buyer is secured by the promoter and the land is sold by the landowner, will the promoter receive a fee (which is usually a percentage of the net sale proceeds, once any promotion costs are deducted).
Given that the promoter is paid a percentage of the net proceeds, the interests of the landowner and promoter in securing the best possible land price are aligned to ensure a promoter receives the best possible fee for their involvement in the project. This is unlike the position pursuant to an option agreement, as discussed above.
The second and, at present, the most common method is for a landowner and developer to enter into an option agreement. In this case a landowner passes the costs associated with securing a planning application to the developer. Once a planning permission has been granted a developer may (but is not required to) exercise an option and purchase the land, either at a fixed price (as specified in the option agreement) or at a discount to market value, having deducted any planning costs and option fees paid to the landowner.
At the point where a developer is consider exercising an option, a landowner and developer’s interests are no longer aligned, as a landowner will want to secure the best possible price for the land and a developer will be looking to pay as low a price as possible. This is particularly difficult where the parties disagree on the market value of the scheme. Often this results in the parties appointing an expert to determine the purchase price, which will invariably add additional costs and time to the process.
There are a number of other advantages to a promotion agreement, as against an option and these are as follows:-
- A promoter’s fee is based on the net proceeds of sale, once the planning costs and other associated costs are deducted. It is therefore in the promoter’s interests to minimise its costs.
- Similarly a promoter will look to minimise any planning gain, as this will also directly affect any profit it achieves in securing planning and disposing of the land.
- It is often the case that once planning is secured a promoter will market the site and usually receive a number of offers. This is a significant difference from the price calculation under an option agreement, which is usually based on an open market valuation undertaken by an expert valuer, rather than determining the price on the open market.
- Under an option agreement, a landowner is required to sell but a developer is not required to exercise the option agreement and buy the land which may leave the landowner with an unsold site. Whereas under a promotion agreement, once planning permission is secured, the promoter must implement a marketing strategy and secure a sale within a certain timeframe.
So far, a promotion agreement does have a number of benefits over an option agreement, however, landowners should be wary of the following:
- Although it is more common now, it is still rare for a promoter to pay a fee when entering into a promotion agreement, whereas it is usually the case that a developer pays an option fee on exchange and a further fee if the developer wishes to extend the option beyond the initial option term.
- A promoter may look to secure a “guaranteed” planning consent, rather than seeking to maximise the density possible on the site and risk a planning refusal or local objections to any scheme. Such an approach may not extract the full potential land value.
- When the conditions are satisfied in an option agreement and a satisfactory planning consent has been secured, there is usually a fixed timeframe in which a developer must exercise the option and if it fails to do so, the option will fall away. A properly drafted option will allow a landowner in these circumstances to take the benefit of any drawings associated with a satisfactory planning consent. The timeframes under a promotion agreement may be longer as a future purchaser will need to undertake their due diligence on the site and planning permission.
Huseyin Huseyin is the Head of the Property Development Department at Harold Benjamin Solicitors and has experience advising both landowners and developers on complex land promotions, whether that is via an option or promotion agreement. His experience acting for both landowners and developers helps to steer the negotiations and achieve solutions that ensure both parties are able to proceed with a transaction.