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Promotion vs Option Agreements

29/06/2016

Against a backdrop of Government policy seeking to significantly boost the supply of homes across the country, Landowners and Developers alike are increasingly looking to promote sites for residential development. 

This may be through a straightforward planning application, but even a basic outline application can be an expensive undertaking. 

So if the immediate prospect is less strong, and the potential is for development in the medium to longer term, then a ‘slowly slowly catchy monkey’ approach of promoting the site through the Local Development Plan process often has to be employed, either as an alternative, or in addition to a planning application. 

Suzanne Tucker, Associate at FBC Manby Bowdler, advises that the key to success is understanding and executing the right strategy, for which professional expertise is crucial.

She said: "In many instances, landowners are looking to outsource the risk and the significant expense of this exercise, by reaching an agreement with a Developer or Promoter, so that the leg-work is undertaken by the Developer, at the Developer’s cost."

"The Developer/Promoter is able to ‘spread their bets’ by entering into a number of such arrangements in the anticipation that at least some of their efforts will succeed; the stakes are much higher for an individual Landowner, who only has one chance, and so an arrangement whereby the Promoter bears the up-front promotion costs, is a popular alternative for Landowners.

"The ‘prize’ for the Developer/Promoter will vary according to the deal that is struck, but there are distinct differences between the two key alternative approaches, those being a traditional Option Agreement or a Promotion Agreement."

Differences

The key differences between the two alternatives are these. By granting an Option, the Landowner is committing to sell the land, provided that certain criteria are met (often being the grant of an acceptable planning permission), but the Developer has complete freedom to decide whether to buy or not, and often also has the freedom to decide on the form of planning application. 

A conditional contract offers the Landowner more certainty that once permission is granted, there is a ready and willing buyer; and the Developer/Promoter, has the same certainty. Either way, the price to be paid is usually determined according to a set formula, being a % of the open market value, calculated following the deduction of at least some of the costs incurred by the Developer/Promoter in undertaking their promotion efforts. 

But because the development is geared directly to suit the specific developer, the value on the open market may be somewhat depressed.

Suzanne adds: "Under a Promotion Agreement, the Promoter will be gearing the planning work to secure the type of development that is most likely to attract a range of developers and improve the potential for competition as to price, because once planning permission is granted, the site is marketed for sale on the open market, with the Promoter taking a percentage of the ultimate sale price."

Common Goal

The primary distinction therefore, is that under a promotion arrangement, both parties are working towards a common goal – to maximise the price for which the land is sold. Under the Option Agreement, it is in the interests of the Option Holder, to do exactly the opposite – the less they can purchase the land for, the more profit they will be able to realise.

There a various tactics which an Option Holder might employ when promoting the land, which could deflate the price paid to the Landowner, but which can later (post-sale) be revised with a view to increasing the land value, to achieve a much more lucrative proposition than was the case when the price paid to the Landowner was calculated.

The approach to the land promotion is therefore of critical importance, as it is not only important in achieving the grant of planning permission, in a form which suits the current marketplace, but it is directly associated with the land value, and the Agreement terms will need to regulate the approach to the planning strategy, as well as determining what will ultimately constitute an acceptable planning permission for both Landowner and Developer.  

History of success

For Landowners, it is important to identify a Developer/Promoter who has local planning knowledge and contacts, a strong professional team and a demonstrable past history of success. However it is also important not to place all the control and decision-making with the Developer: the approach to promotion must be bespoke to the relevant site, and the Landowner’s own specific requirements and for the Landowner should be kept informed throughout and their opinions taken into account. 

Suzanne, of FBC Manby Bowdler's expert Planning Team said; "For Developers, it will be important to ensure that they are given the flexibility to work proactively in their own style". 

"We are finding that many Landowners are opting to utilise the skills of specialist promoters and developers in this way, and we offer specialist guidance to Landowners and Developers alike in negotiating this delicate balance of interests. This way, both parties can achieve their goals successfully and collaboratively."

Follow this link to find out more about the services provided by the Planning Team at FBC Manby Bowdler.

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