Option or promotion agreement – which is best for landowners?

Property
Landowners want to get the best return on any development. We’re often asked whether they should choose an option or promotion agreement with their developer.

The reality is that the most appropriate agreement will depend on a landowner’s appetite for getting involved in the development process; getting planning and promoting the land.

The differences in a nutshell…

An option agreement leaves the planning and marketing process largely in the hands of the developer.  

Under a promotion agreement, the landowner is much more hands-on and will know the value of the developed land before agreeing to sell it.

And in more detail…

An option is a contract under which the landowner agrees to sell land to a developer, if the developer chooses to buy it within a fixed option period.  The price will either be fixed at the outset or calculated when the developer exercises the option, by reference to the market value of the land at that point. The developer’s right to buy the land will usually be conditional on achieving planning permission or sometimes on completing the development, both of which will enhance the value of the land. Because the ultimate value of the developed land will not be clear when the price is agreed, the option may include provisions regarding overage.  These allow the landowner a share in the end value, by requiring the developer to pay a proportion of the uplift in value tot he landowner.  

Under a promotion agreement, the landowner and developer work together with the shared aim of maximising the land value and achieving a sale.  The landowner is not committed to selling the land, so can wait to see how much the planning and promotion process adds tot he value before making a decision.  The developer will get an agreed share of the eventual sale proceeds, so will share the landowner’s desire to achieve the highest possible price.

The key differences include:

·     landowner involvement – with an option agreement this is largely contracted-out to the developer, whereas a promotion agreement is much more collaborative.

·     landowner discretion - once an option is granted, the developer chooses whether or not to buy the land.  A promotion agreement leaves this choice of whether to sell with the landowner.  If the planning process does not enhance the land value as much as expected, the landowner could choose not to sell at all.

·     relationship between the parties - a well-drafted option agreement will set out each party’s obligations clearly.  A promotion agreement may be less precise, because it relies on the parties working together which requires mutual trust and introduces concepts like co-operation and good faith.  This leaves more scope for disputes over fair dealing and the parties’ legitimate expectations.  

 One common issue for negotiation is what guarantee the developer will have of some sort of return on its work.  Unless the agreement says something different, the landowner could decide to sell the land before planning permission has been granted, so there would be no enhanced value for the developer to share.

Which is best?

The decision will come down to the landowner’s appetite for being involved in the promotion process and the relationship between developer and landowner.  Whichever agreement is chosen, a landowner needs to take advice, consider the tax position, and then ensure that the formal agreement represents the parties intentions.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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