Promotion Agreement or Option Agreement? | Howes Percival

Promotion Agreement or Option Agreement- What’s in Your Best Interest?

There is a long history of Developers using Option Agreements to secure interest in parcels of land which have the potential for Planning Permission but, in recent years there has been an increase in the use of Promotion Agreements.

Option Agreements:

An Option Agreement does what it says on the tin; it gives the Developer the ability to buy the land from the Landowner within a given period of time (usually 5-10 years but this is negotiable).

A Developer will agree to apply for Planning Permission (at their own cost) during the period of the Option and if permission is granted and satisfactory to the Developer then it may exercise their option to purchase the land.

Promotion Agreements:

A Promotion Agreement is used most often when there is medium or long-term planning potential for the land. The Promoter (usually a Developer, but any person may act in this capacity) will agree to promote the land at its own cost and apply for planning permission.

The Promoter will then market the site once the permission has been granted and it is at this point the Landowner is bound to sell the land.

The proceeds of any sale to a third party are then divided into pre-agreed shares between the Landowner and the Promoter (after the Promoter has been reimbursed for planning and other professional costs).

Differences:

The Landowner is contractually bound to sell the property if they enter a Promotion Agreement, conversely in an Option Agreement there is no onus to do so. The Landowner, therefore, loses control of the land in an Option Agreement but maintains a hold during a Promotion Agreement.

A Promotion Agreement effectively places both parties on the same side (both wanting to achieve the best value for the land so they can share in the proceeds). This is different from an Option Agreement as the Option is exercisable after the grant of planning permission (satisfactory to the Developer). Naturally, the Developer wishes to pay as little as possible and the Landowner as much as possible. This can place the Landowner and Developer at loggerheads.

Pros/Cons:

It is hard to determine if either Agreement is better than the other, each has its positives, which when negotiated well, can secure a good ‘deal’ for both parties.

There is a school of thought that a Promotion Agreement is better for the Landowner. They work alongside the Developer and therefore have a degree of control. Option Agreements differ as the Developer retains control of the planning application and if they decide the buy the land based on that Application.
A Developer is likely to try and argue the price in an Option Agreement. However, Options can be subject to a fixed price or made by reference to a market value and therefore the tensions that could appear when discussing a final price would be alleviated.
Rights are gained over a parcel of land (valuable to a Developer when it places an Option Agreement over land). Placing them a ‘step ahead’ of the competition, conversely, this could mean the Landowner loses control of the land as it is effectively tied up by a specific Developer.
Option Agreements can be effective for Landowners; a third party (the Developer) will bear all the costs and risks associated with obtaining Planning Permission (which can easily exceed many £10,000’s). Usually, Options will not have a mechanism for these costs to be deducted, whereas in Promotions they will (this is something to consider as a Developer as it can lead to a positive situation where the costs are taken from the sale proceeds).
Some argue there are issues with enforceability in Promotion Agreements; in tying down the Landowner to actually sell the land where there is planning. This can be easily overcome by good drafting and negotiation of positive covenants and restrictions.
Promotion Agreements may be more appealing to Developers in the current climate; there are high acquisition costs and the associated Stamp Duty to consider. Having Promotion Agreements in place can allow for set off for some of these costs.
Landowners can also be confident that in both types of agreements the Developer will likely pay for their legal and agent fees, or at least a proportion thereof.

Conclusion:

The negotiation and drafting of each Agreement can lead to a positive outcome for the parties in either scenario and it is therefore important to understand your alternatives, the security of your position and what you have to offer to the other party before entering to any Agreement.

If you would like any advice on Option or Promotion Agreements, please contact Nicholas.James@howespercival.com or another member of the Leicester Commercial Property team.

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