In recent years developers and landowners have increasingly been attracted to promotion agreements as an approach to developing land, finding that this newer concept has many benefits not offered by the traditionally popular option agreements. There are clear advantages for both parties in promotion agreements and they are well worth considering when the time comes to develop a site.
What’s the difference?
The more commonly known option agreement is a contract between the developer and the landowner whereby the developer pays an option fee for the right to buy land for a predetermined amount within an agreed time frame, usually once the developer has obtained planning permission for development of the site. Option agreements are still very popular, particularly for short-term developments with guaranteed pre-let.
Promotion agreements are more attractive for longer term projects because they allow the developer to promote the land without having the financial burden of actually purchasing it. Under a promotion agreement, instead of buying the land, the developer and land owner come to an agreement whereby the developer will promote the land with the aim of securing planning permission for development.
Provided planning permission is granted, the developer will then market the land to potential buyers. Once the buyers are found, the landowner sells the ‘promoted’ land and the net sale proceeds are shared between the developer and the landowner. The parties agree in advance the proportion of their share, which should reflect the level of risk each has undertaken.
Financial Advantage for both parties
The great advantage in a promotion agreement is financial – the developer avoids the cost of buying the land outright but shares in the profits of the development along with the landowner. In difficult economic times, financial outlay can be the deciding factor in a project going ahead or not, so promotion agreements can be a positive way of getting developments to a successful conclusion. For this reason promotion agreements can often be useful for smaller developers working on longer term projects.
The landowner also reaps benefits from a promotion agreement because he holds on to the land for longer and sells at the end of the process when the land is at its highest value.
Benefits of working together.
The option agreement places the developer’s and landowner’s interests at odds to each other. The developer wants to buy the land at the lowest price whilst the landowner wants the maximum for his sale. Promotion agreements are more collaborative and can be tailored to suit both parties. It is in both parties’ interest to seek the highest value for the land possible and this leads to a more positive working relationship between the parties.
Beware of risks in any collaboration
There are still risks to the developer, however. The landowner could pull out of the agreement after the developer has invested significant time and finance. The developer should therefore ensure that the contract with the land owner gives him sufficient protection in case of such an eventuality. The developer’s profits are also likely to be lower than the potential gained under an option agreement because the promotion agreement involves sharing profits with the landowner.
Promotion agreements can become complex as both parties attempt to set out obligations expected of the other party throughout each step of the process. It’s important for both parties to seek specialist advice when embarking on such an agreement.