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Option Agreement or Promotion Agreement?

1st September 2020

The need for more housing is well-documented, with South Staffordshire alone seeking an additional 245 dwellings a year until 2037.  Fortunately, the semi-rural nature of the region ensures there is adequate opportunity for development, if landowners can be persuaded to sell.

Ansons has a huge amount of experience working with landowners and developers across Staffordshire and the West Midlands, for both landowners and developers.

The one question we regularly face is: “Should we enter into a Promotion Agreement or an Option Agreement when seeking to buy/sell a development site?”

The answer is never the same of course; every deal is unique, and the specific circumstances of the deal will ultimately decide which is the more appropriate.  In reaching a decision however, below are some of the key considerations to bear in mind.

What’s the difference between promotion and option agreements?

There will often be a number of parties involved in arranging a deal, but any agreement will primarily revolve around the obligations of the landowner and the developer/promoter.

Promotion Agreement – a developer or promoter agrees to apply for planning permission for a development on a landowner’s property and market the property for sale on the open market once planning permission has been obtained.  The promoter funds the planning and marketing costs initially.  If planning permission is obtained, the property is marketed for sale and sold.  The promoter’s costs are reimbursed to the promoter out of the gross sale receipts and the promoter receives a proportion of the net sale proceeds (along with the landowner).

Option Agreement – a developer intends to apply for planning permission to develop the property, and requires an option to purchase the property on notice following receipt of a planning permission.  An option fee is usually paid to the landowner for the option.  Once planning permission is granted, the developer can serve notice to purchase the land at a price agreed previously with the landowner, which is typically a discounted percentage of the market value.

For both Promotion and Option Agreements, the costs of obtaining a planning consent will, in most cases, be borne initially by either the promoter or the developer.

What must a landowner consider?

One of the key considerations for a landowner will be how much they wish to be involved in the planning process. A Promotion Agreement will provide the landowner with a greater degree of control and involvement with the planning and promotion, and will leave a landowner better placed in terms of knowing the value they will get for the site before they agree to sell.  An Option Agreement in contrast will leave such matters in the control of the developer under the terms of the agreement.

As touched upon above, a Promotion Agreement will also leave the landowner with the ultimate decision as to whether to sell or not.  If, for whatever reason, the planning permission granted does not enhance the value to the level anticipated, then the landowner need not sell at all.  Again, in contrast, an Option Agreement gives control of this aspect to the developer, who has discretion over whether to serve an option notice and proceed with purchase.

The two forms of agreement also vary considerable in terms of the relationship it establishes between the parties involved.  A Promotion Agreement creates a much more collaborative relationship, with both parties wanting to achieve the best value for the land so they can share in the proceeds.  With an Option Agreement, there is far less collaboration, with the parties’ interests for the most part at odds; the developer will want to secure the land as cheaply as possible, in a time frame to suit them.

Whilst this may seem very favouring Promotion Agreements  from a landowner’s perspective, (and there is indeed general consensus that such agreements are preferential for landowners), an Option Agreement will often set out each party’s obligations more clearly, and not contain a mechanism by which costs for obtaining the planning are deducted from the purchase price.

Promotion Agreements however will usually provide for the promoter’s planning costs to be reimbursed on a sale (prior to the net sale proceeds calculation), and may be less precise due to its reliance on co-operation and good faith.  This can in turn give rise to a greater potential for dispute.

Obtain advice

The only certainty in approaching which agreement is more appropriate is the need for clear, expert advice.  The best agreement will always be one that has been well drafted, and which accurately reflects what the parties have agreed.

If you want to discuss buying or selling land for development, please contact Jonathan Rowley, Senior Associate in Ansons’ Commercial Property team, on 01543 431 990 or by email at jrowley@ansonssolicitors.com

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