19 March 2019
Option or promotion agreement – which is best for landowners?
If you have land that is ripe for development, how do you go about ensuring you get the best possible return on its value? If you are not experienced in planning and construction, you are likely to need the expertise of a professional developer to enhance the value of the land. The two most common ways of organising this are via an option or promotion agreement. Each has advantages and risks and expert legal advice is crucial to make the right choice and ensure a well-drafted agreement is drawn up to protect your interests.
‘Whether an option or a promotion agreement is most appropriate will depend on how closely you want to be involved with the process of getting planning and promoting the land’ says Maria Mowberry, commercial property solicitor at B P Collins. ‘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.’
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 to the 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 to the 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 - The most obvious difference is the extent to which the landowner is actively involved in the promotion process. Under 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 cooperation 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. An expert lawyer will be able to guide the landowner in making this choice and, crucially, make sure that the formal agreement with the developer reflects accurately what the parties have agreed. Good drafting will help to make the development project a success and avoid profits being wasted on costly disputes.