Option or Promotion Agreement, which is best?
Hazel Eccles, a senior associate in our Real Estate team and Head of our Agriculture and Rural Land Team, considers the pros and cons of entering into either an option agreement or a promotion agreement.
When a landowner has land suitable for development and is thinking about how best to gain planning for a subsequent sale to a developer, typically they may consider entering into either an option agreement directly with a developer, or a promotion agreement with a planning specialist ‘promoter’ who will then work with the landowner to sell to a developer.
There are many other arrangements that can be considered (please see the below article “What are a landowner’s options for strategic land development?” for further information), but option and promotion agreements tend to be the most popular.
What is an Option Agreement?
An option agreement is an agreement between two parties, typically a developer and a landowner, whereby the developer will have the option to purchase land from the landowner, usually once certain conditions are met. In the context of potential development, a developer will be able to purchase the land in question once that land has the benefit of a planning permission at an agreed price. The price may be a fixed pre-agreed sum, or it may be assessed at the date that the planning permission is granted as the market value, sometimes deducting the developer’s cost in gaining the permission and usually a pre-agreed percentage reduction to reflect and reward the developer’s efforts in gaining the permission in the first place.
What is a Promotion Agreement?
A promotion agreement is an agreement that a landowner has with a planning specialist to promote the landowner’s land through the planning process in order to gain planning permission. Once planning permission is granted then the landowner and the promoter work together to market and sell the land to a developer. The price paid by the developer would then be split on a pre-agreed basis between the landowner and the promoter.
What are the main Advantages and Disadvantages of each type of agreement?
There are advantages and disadvantages to each type of agreement and it will be for each landowner to assess what is most important to them when they are considering selling their land to a developer. Generally speaking, option and promotion agreements can look quite similar during the period before a planning permission is granted. The landowner may be afforded more control over the content of the planning application submitted under the terms of a promotion agreement, rather than in an option agreement where the ultimate developer-builder will want to retain as much control as possible. It is after the grant of a planning permission that option and promotion agreements can offer different outcomes.
The main disadvantage to an option agreement is that following the grant of a planning permission, the market will not be tested at the point that the landowner will sell the land to the developer. The land would not be put on the open market for offers to be made by third parties and so, chances are, the landowner may sell the land to the developer under the option agreement for comparatively less than if they had tendered the land for sale on the open market. A developer will understandably always want to pay the least it can for the land, and the landowner will always want the best price it can realistically achieve. Clearly this is where there will be the most cause for disagreement between the two parties, as their interests become misaligned.
Conversely, under a promotion agreement one of the main advantages is that the landowner and the promoter have their interests aligned to gain the best price for the land once a planning permission has been granted. A landowner does not need to worry about being short-changed at the point of sale, knowing that the market will have been properly tested and the best price has been achieved.
With a promotion agreement, once a planning permission satisfactory to both the landowner and the promoter has been achieved then the promoter can compel the landowner to sell the land, usually as long as certain conditions have been met. For example, the landowner may require a minimum price to be met before being obliged to sell. This can be a disadvantage to the landowner if they are required to sell to a developer who may not be their preferred bidder or at a time where wider economic influences may drive the price down (albeit with the ‘minimum price’ safety net).
Under the terms of an option agreement, the developer will have the option to purchase the land, but they will not be obliged to do so. It is not often, however, that a developer would decide to walk away from the deal after it has gone to the trouble and considerable cost of gaining a planning permission. From the landowner’s point of view this may not be too concerning in any event, as they would be left with the benefit of planning, which they would then be able to sell to a third party. In these circumstances a landowner would need to be very careful to ensure that the copyright of plans and planning materials can be transferred to them.
One of the advantages of an option agreement is that the landowner will have personally chosen the developer that they propose to sell their land to. It may be that the landowner lives in close proximity to the land in question and they have a particular aesthetic in mind, or the landowner may like how the particular developer operates their business and so feels that they would be best fit with them to work with.
Making the choice
It is clear that the decision to proceed with an option or promotion agreement will depend on the personal choice of the landowner, and what is driving them to pursue development on their land. Many of the disadvantages of each type of agreement can be mitigated by agreeing appropriate terms in advance, such as a minimum price for which a landowner will be required to sell, capping planning cost deductibles, and ensuring that the landowner has appropriate levels of approval control at each relevant planning and marketing stage.
We would always advise landowners to take professional advice from land agents and lawyers at the earliest opportunity if they anticipate that their land has any development potential, and as soon as they have been approached by a developer or promoter, so that they can be confident that they are getting the best deal.
The Strategic Land team has a wealth of experience in dealing with both option and promotion agreements. We have excellent connections with agents, developers, and promoters, who operate in this field. So, if you are a landowner, or know a landowner, who is interested in exploiting the opportunities available for the development of their land then please contact Hazel Eccles or Michael Higgin for further information on what the team can offer.