If you are lucky enough to own land that has potential for future residential or commercial development the increase in land value is likely to be significant.  However, the time, costs and skills incurred in obtaining the necessary planning consent is often too great for the landowner to contemplate themselves.

Landowners are often approached by developers or promoters offering terms for Option Agreements or Promotion Agreements in order to help achieve a planning consent and an eventual sale.

The summary below is intended to be a helpful reference if you are contacted directly or happen to be contemplating strategic development opportunities.

Option Agreements

The landowner grants a Developer a right to buy the land within a given period if the Developer obtains a satisfactory planning consent.The Developer applies for planning permission at their own cost and risk.When a satisfactory planning permission is obtained the Developer can exercise the Option to buy the landIf a satisfactory planning consent is not obtained or the Developer chooses not to exercise the Option then the Option Agreement falls away at the end of the Option period.The Price is agreed between the parties or determined by a third party.Price is usually the open market value with planning permission, less agreed costs of obtaining the planning permission and less an agreed percentage to reflect Developer’s risk.An Option Agreement can often guarantee an up-front payment known as an Option Fee.

Promotion Agreements

A landowner enters into a contract with a Promoter who will not necessarily be a Developer.The Promoter and landowner work together to promote the development.This usually means the Promoter doing all the work (and incurring all the costs at their risk) to obtain planning permission.Once planning permission is obtained the landowner then sells the site to a third party.Agreed Promotion costs are deducted from the ultimate sale proceeds which are then split between the landowner and Promoter at a pre-determined percentage.An up-front payment can be paid to the landowner by the Promoter – like an Option Fee.

Pro’s and Cons

The main advantage for the landowner with an Option Agreement is having an independent third party bearing all the risks and costs although an important disadvantage is the loss of control over the land during the Option period (which could easily be between 5 and 15 years). An Option Agreement is typically entered with a house builder, who ultimately will be looking to buy land as cheaply as possible.  The land value is arrived at by negotiation between the parties and this can often lead to a dispute where expert determination is required. Under a Promotion Agreement the interests of landowner and Promoter are aligned with both looking to secure the best possible price from an open market sale at the outset.In an Option Agreement the single buyer is identified at the outset with the price negotiated without the benefit of market competition.  This can therefore depress value in theory.With a Promotion Agreement planning is secured and the site openly marketed with the benefit of that planning with competitive bidding then driving up value.

Hybrid Agreements

In more complex cases hybrid agreements can be negotiated.  These are a combination of both Option and Promotion Agreements and are more common in larger schemes with mixed use development.

Be Alert and take good advice!

What is vital is that Heads of Terms for either an Option Agreement or a Promotion Agreement are negotiated by an experienced agent, agreements drafted by specialist solicitors and good quality tax advice taken at an early stage.  Landowners may miss out on significant value or create future problems for themselves if those agreements are not negotiated and drafted properly.  Reasonable professional fees should be met by the developer/promoter therefore there should be no reason not to take good advice from the outset.

Butler Sherborn has experience in negotiation of both Promotion and Option Agreements for schemes ranging from 2 acres to 100 acres.  For more information please contact Richard Greasby 01285 883740 richard@butlersherborn.co.uk.