As a landowner with a parcel of land that has development potential, you may have questioned how best to unlock that value. Whether your land sits on the edge of a growing town or simply benefits from a location which is attracting development interest, the agreement you enter into could be the difference between a good outcome and an exceptional one.
Two agreements dominate the strategic land market in England and Wales: the option agreement and the promotion agreement. While both agreements offer a route to sale, they operate in different ways, carry different risks, and will not suit every landowner equally. In this article, we broadly explain how each agreement works, compare some of the commercial and legal considerations and offer some guidance on which might deliver the better outcome for you.
What is an option agreement?
An option agreement will allow a developer the right to buy your land within a specified timeframe, which is known as the option period. Typically, a one-off premium payment will be made by the developer to the landowner for the benefit of the option period. There may be mechanisms contained within the agreement which will allow the developer to extend the option period in certain scenarios. As landowner you will still retain ownership of the property throughout the option period.
Commonly, the purchase price for the land will be negotiated between agents acting on behalf of the developer and landowner at “Heads of Terms stage”, prior to solicitors being instructed to draw up, negotiate and ultimately exchange contracts. The purchase price can either be a fixed fee, often taking into account any premium payments made by the developer and also costs the developer has incurred during the course of securing planning permission, or it can be determined by way of calculation depending on the extent of the planning permission.
As mentioned above, the developer will typically try to obtain planning permission for some sort of development on the land (as this unlocks the higher land value, ultimately benefitting both parties). The option agreement may stipulate which planning conditions would be unacceptable to them / what types of development would not be allowed on the land.
What is a promotion agreement?
A promotion agreement will allow a promoter to fund and manage the entire planning process, in exchange for a percentage of the net proceeds of the sale of the land (known as the promotion fee), once it is sold with the benefit of planning permission. The promotion agreement will last for a specified amount of time which is known as the promotion period, and again typically an annual or one-off payment will be made to the landowner. As landowner you will still retain ownership of the property throughout the promotion period.
The promoter will bring the land to market, with the landowner’s blessing, and seek to set up a sale to a third-party, which is typically a developer who wants to develop the land according to the planning permission which has already been granted. The promoter’s reasonable planning and professional costs will be reimbursed to the promoter from the gross sale proceeds first, and then the net sale proceeds will be split between the landowner and the promoter according to the promotion fee / percentage split which has been agreed in the Promotion Agreement.
Option agreement vs promotion agreement: key differences
Both structures seek to maximise land value, but they do so in different ways.
Time and certainty
Option agreements
- Usually shorter-term arrangements
- Sale price is generally agreed early in the process
- Greater certainty over the minimum financial outcome
- Therefore negations may take longer
Promotion agreements
- Often longer-term arrangements
- Sale price is determined by the open market once planning permission is secured
- Potential for greater returns, but with less certainty
Landowner control
A promotion agreement will often give the landowner greater involvement, including:
- Input into planning strategy
- Approval rights over the eventual buyer
- Agreement on a minimum acceptable sale price
Under a typical option agreement, many of these decisions rest with the developer, although terms can always be negotiated.
Financial considerations
The key commercial question is balancing certainty against potential uplift.
While an option agreement can provide a clearer financial outcome from the outset, a promotion agreement may achieve a higher sale price if the land is successfully marketed to competing developers following the grant of planning permission.
Which agreement is right for you?
There is no simple right answer for which agreement would be better for a landowner, as it really depends on your circumstances and what you are looking to achieve. For a landowner who needs capital in the near term, values certainty above all else, or is dealing with a smaller site where the planning process is straightforward, an option agreement with a well-negotiated price formula may be appropriate.
For landowners with larger strategic sites, a promotion agreement may deliver a materially better financial outcome, but of course this depends on the quality of the promoter, robustness of cost recovery provisions and the percentage fee being taken by the promoter.
Speak to our team
Both agreements are complex and often long-term commitments, and commercial terms vary enormously from one agreement to the next. The detail of the drafting will often play a large part in determining how much money you receive and how protected you are if things do not go to plan.
If you have been contacted by a developer or promoter, or if you are considering marketing your land with a view to develop, our specialist commercial property team has extensive experience in advising landowners on both structures and would be happy to support you. Please contact Ellie Jones or Adam Burrage for an initial conversation without obligation.
