Gaining from a promotion
Posted by Susan Hart on 13th August 2012
Landowners are familiar with the idea of granting an option over land to a developer. Such a document imposes an obligation on the developer to obtain planning permission; and then the developer would have an option to purchase the land at a high percentage of market value. The landowner is investing in the developer’s expertise to try to maximise the value of the land in question.
Differences from options
Another alternative which is now gaining more prominence is the promotion agreement. This type of agreement is entered into between a landowner and a land promotion company. It is like an option in the sense that it will impose an obligation on the promoter to obtain planning permission for the land at its own expense. The difference is that once planning permission is granted, instead of the promoter having the option to buy, the promoter has to market the property and then organise the sale to a developer. The landowner does not part with the ownership of the property nor does it grant a right to buy to the promoter at any time. The only contract to sell is the one entered into by the landowner with the developer introduced by the promoter.
Fees and costs
The promoter will take a specific proportion of the gross sale proceeds as its fee on the completion of the sale. At the same time, the promoter will require its promotion costs to be reimbursed. The marketing costs are also deducted from the sale monies, with the balance going to the landowner.
The key for the landowner is to try to keep as much control over the planning process and the marketing process as possible. Ideally the landowner should have the right to approve the planning strategy and the marketing strategy, as well as the right to approve the marketing agents and to appoint them jointly with the promoter. The promoter, on the other hand, will not want its actions unduly fettered.
Crystal ball gazing
One of the difficulties with such agreements is that, with the planning process likely to take several years, there is no knowing what the market for the sale of development land is likely to be in 5, 10, 15 years time. Thus, careful drafting is required to ensure that the eventual sale fee will be the best possible in the circumstances.
If the landowner has retained adjoining land, or if the sale of the development is likely to be in tranches, it may not be possible now to set out in the promotion agreement itself all the relevant rights and covenants which will need to be incorporated on the sale in, say, 15 years time. However, the promotion agreement must be drafted widely enough to allow the landowner to introduce provisions appropriate at the time of sale to preserve the value of his retained land. There must be scope for the imposition of overage on a sale to a developer and provisions in the document setting out how that is to be secured/shared if it is paid.
Whilst promotion agreements share some similarities with options, they involve many different issues and a landowner should always seek professional advice before entering into them.