Jane Gunnell, in our Commercial Property team, explains the role of a land promotion agreement and when a landowner should sign one with a promoter or developer.
Option Agreements and Promotion Agreements are sometimes referred to interchangeably, as though they are variations of the same type of legal arrangement. This is not true, they are, in fact, fundamentally different. The most common form of Option Agreement gives a developer a unilateral right to call for the purchase of land on the terms set out in the Option Agreement. This normally follows the grant of Planning Permission for redevelopment.
In contrast, a Promotion Agreement is not a contract for the sale and purchase of land, but rather a commercial agreement between landowner and promoter under the terms of which a developer or specialist land promoter endeavours to increase the value of the landowner’s property by obtaining Planning Permission for development prior to sale.
Option Agreements are a well-established way of selling development land, shifting the often significant cost of applying for planning permission to a developer purchaser in return for a discounted purchase price. Promotion Agreements are a developing area of law and it is now possible to create a hybrid Promotion/Option Agreement, adding a level of complexity which is outside the scope of this blog article.
Under a Land Promotion Agreement, if a satisfactory Planning Permission is obtained within the agreed promotion period, the landowner will usually be required to sell the relevant land with the benefit of that Planning Permission on the open market. A Land Promotion Agreement should, therefore, only be used where the landowner has already decided that it is committed to selling the property on the open market if satisfactory Planning Permission is granted.
Under an Option Agreement, the landowner is usually obliged to sell the property to the developer once Planning Permission has been obtained. This gives rise to a conflict of interest between the landowner and the developer because the landowner normally wants to maximise the purchase price, while the developer wants to minimise the purchase price. Theoretically, under a Promotion Agreement, both parties’ interests are aligned, as once Planning Permission is obtained, the land will be marketed and sold on the open market to a third party.
Interestingly, a developer/promoter has no right to protect a Promotion Agreement over registered land by registering a notice in the Charges Register of the title to the property in question, as he does not have the right to buy the property. Most Promotion Agreements do however include an obligation to impose on a buyer of the land while the Agreement is in force a requirement for a Deed of Covenant requiring the buyer to comply with the terms of the Promotion Agreement and this can be protected by a restriction on the Proprietorship Register at the Land Registry.
The steps involved in land promotion are usually as follows:
Planning evaluation
Assessing the potential of the land for development, considering access, size, local planning policies and demand.
Agreement
Negotiating and entering into a Land Promotion Agreement between the landowner and the promoter.
Preparation for planning application
Often involves working with planning consultants to design a development proposal for the property that is consistent with planning policies. The promoter will usually need to consult with Local Authorities and other consultees to produce a proposed scheme that has a good prospect of obtaining Planning Permission.
Application
Submitting a planning application to the Local Planning Authority (LPA). The promoter manages the planning process, including procuring necessary reports and studies and providing these to the LPA.
Marketing
Once a satisfactory Planning Permission is granted, the promoter will develop a disposal strategy for the sale of the land which will set out how and when it will be marketed to potential buyers.
Sale
The landowner sells the land at a price that reflects the value added by the Planning Permission. The sale proceeds are then shared between the landowner and the promoter in accordance with the terms of the Promotion Agreement. As the promoter’s share is in effect a fee for promoting the land, then VAT is usually added to the promoter’s share. This is something that many people are unaware of when calculating the likely return under a Promotion Agreement disposal but should always be taken into account, particularly if the landowner is unable to recover the tax.
Blandy & Blandy’s award-winning Commercial Property team has significant experience in dealing with the acquisition and disposal of development land and is supported by our nationally recognised Planning & Environmental Law team.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
