Strategic Land Development – Option and Promotion Agreements

With an ever-increasing demand for new housing, it is a fruitful time for landowners considering their options for the future use of their land. Whether approached directly by a developer already, or if weighing up the decision to market the land with a dedicated land agent or promoter. There are opportunities abound with strategic land development.

When considering the strategic development of land, each course of action comes with its own distinct benefits depending on the terms of the agreement. As well as the objectives and motives of the parties involved and the nature of the land itself. Below are two of the most common types of transactions we encounter when acting for clients looking to develop land.

Option Agreements

An Option Agreement is exactly as the name suggests. It grants the developer a right to opt to buy the land, often within a specified period of time. How long that option period lasts for is often down to the agreement between the parties. Depending on the proposal for development and scope of the project. For large scale developments the option period may last for a number of years.

The Option Period

During the option period the developer will often be obliged to apply for planning permission to develop the land. A landowner may wish to have involvement in the type of planning application being submitted. Or they may be happy to allow the developer autonomy over the process. If planning permission is granted, the developer may wish to exercise it’s right to purchase the land at the agreed price. The developer is not necessarily under an absolute obligation to buy the land. It merely has the option to if it wishes, as there may be occasions where the developer cannot (or will not) exercise its right.

For example, if the proposed development is too costly or affects the viability of a decent return, the developer may well let the option expire. However, where the developer exercises its right to purchase the land, the price they will pay will be determined by the terms of the Option Agreement. This can either be a fixed price or it can be calculated using a specific formula or as a percentage of the market value of the land. The suitability of calculation will often hinge on specific factors of the proposed development. Once the developer exercises its right it will be unable to withdraw its offer. The landowner will then be contractually bound to sell the land.

If planning permission is refused

If planning permission is refused, the developer will generally be obliged to pursue a planning appeal. Especially if there is a decent chance of it being approved on appeal. This will often be subject to other factors.

An alternative, which is sometimes useful for tax purposes, is for the landowner to retain a mutual right to ‘put’ the land on the developer. This means the landowner has an equal right/option to require the developer to purchase the land.

Main advantages

Option Agreements have several advantages for landowners. For example, the risk, burden and cost of applying for planning permission (which can be a very expensive and time-consuming process) will be shouldered by the developer. In exchange, the developer secures a period of exclusivity over the land. To guarantee its right to acquire. Also as an incentive for the risk and cost they are assuming. This route may therefore appeal to the more risk-averse landowner. Or those who want to take a hands-off approach to development.

The obvious disadvantage is that the exclusivity given to the developer means that the landowner is heavily restricted from considering other options for the duration of the option period. Which may, in some cases, be for several years. Landowners who wish to make a more immediate disposal of the land, or who may wish to gain an income from it via alternative arrangements, may not find the limitations of an Option Agreement very appealing given the loss of control.

Promotion Agreement

A Promotion Agreement shares similarities with an Option Agreement. The main difference, however, is that both parties have a common goal. To jointly promote the land and exploit its development potential. This will appeal to hands-on landowners who wish to take a more proactive approach to the development of its land. In this case, the promoter (who may not be the actual developer) works in harmony with the landowner to evaluate the viability for development.  They will also bear the cost of preparing the necessary planning material. Also carrying out site assessments, liaising with the local planning authority regarding allocation of the land for development, submitting the planning application. And, where applicable, marketing the land for third party developer interest.

In exchange the promoter will often take a percentage of the sale proceeds once the land is sold off. It is therefore in the interests of both promoter and landowner to work together. To both maximise the value of the land and the split of the sale proceeds. These will be a point of negotiation between the parties.

Main Advantage

The main advantage of a Promotion Agreement is that both parties work towards a common goal. To maximise the value of the land and to sell it off for best price possible. Under an Option Agreement the developer will typically want to minimise the value of the land. To ensure it acquires the land at the lowest possible value to maximise its own return.

The considerations that a landowner must give when entering into a Promotion Agreement are the similar restrictions on their own use of the land for the duration of the term of the agreement. For example, landowners are often restricted from disposing of the land. Or doing anything which may jeopardise the promoters’ ability to obtain planning permission, for which it may be going to considerable expense to obtain. The nature of a Promotion Agreement can also create an unintended partnership arrangement between promoter and landowner. As a consequence, both parties will need to bear in mind any potential tax issues which may arise as a result.

Alternative options

Landowners do have other options at their disposal. For example, they can take suitable advice from planning experts and make an application for planning permission themselves. If granted the landowner can look to sell the land with the benefit of planning permission to a keen developer. The landowner may have several interested parties and be in a prime position to sell to the highest bidder. However, bear in mind that the cost of pursuing an application for planning permission and its associated expenses, can be a hugely costly exercise.

Please note, this article does not constitute legal or tax advice and its content may be subject to modification depending on any changes in the law.

Hart Reade Solicitors are a full-service law firm with offices in Eastbourne, Hailsham, Polegate and Meads.  We hold both Lexcel and Conveyancing Quality Accreditations from the Law Society of England and Wales.  To make an appointment with one of our commercial property Solicitors, please phone our office on 01323 727 321, or alternatively please complete the contact form below.