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Land Promotion vs Option Agreements: Which one is best?

01 Mar 2017

Questions we are frequently asked by landowners are what is the difference between an Option Agreement (“Options”) and a Promotion Agreement (“PAs”), and which should they enter into?

Options are typically contracts in which a developer has an exclusive right to require a landowner to sell its land to the developer within a fixed time period. Ordinarily, the developer will apply for planning permission to develop the land. If it is granted and the developer exercises the option, the purchase price will usually be discounted from market value.

PAs typically require a developer to apply for and use reasonable endeavours to obtain a planning permission in respect of the landowner’s land and, following its grant, to market the land, with the benefit of the planning permission. The landowner will then be required to sell the land to the highest bidder and the developer will receive a fixed share of the net sale proceeds, following deduction of its planning, marketing and other up-front costs.

There is no right or wrong answer as to which is best. It depends on the circumstances. Set out below are some key points for landowners to consider:

  • PAs typically incentivise both parties to collaborate to maximise the end market value. In the case of an Option, a developer will wish to minimise the price it pays, possibly by delaying the exercise of the Option until the market falls.
  • The price payable pursuant to an Option will usually be based on a surveyor’s assessment of what the open market value is, rather than, in the case of a PA, market tested.
  • PAs allow a landowner to benefit from the experience, knowledge and funds of a developer in applying for planning permission and marketing their land.
  • Developers may be less likely to agree to unreasonable or onerous planning obligations in the context of a PA, because it may impact market sale price. In the context of an Option, a developer usually deducts such costs from the price payable to the landowner, but may later re-negotiate the planning obligation, leading to a windfall for the developer.
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  • PAs typically require reimbursement of the developer’s up-front costs from gross sale proceeds, before net sale proceeds are divided between the parties. Landowners may wish to consider capping such reimbursement. As PAs oblige a landowner to sell the land, once planning permission is granted and marketing completed, landowners may then want to consider a minimum price.
  • Sometimes a PA will allow the developer itself to bid for the land.
  • Developers may wish to include third party land in a PA. It is possible that a planning permission may result in one area of land being of less value than the other or perhaps one not achieving permission at all. Landowners will wish to consider what would happen in these circumstances. Can the developer sell some, but not all of the land? Should a price adjustment mechanism be included to ensure all parties achieve fair value?

Specialist legal advice is needed in dealing with strategic land. Mistakes can be expensive. If you are a Landowner and are considering the grant of an Option or PA, please contact Chris Anderson, Associate Solicitor in the commercial property team at Hay & Kilner

Call: 0191 232 8345

Email: Chris.Anderson@hay-kilner.co.uk