Land promotion agreements between landowners and developers have in recent years become more common than traditional option agreements.
What is a Land Promotion Agreement?
Typically a land promotion agreement provides that:-
- The promoter (usually a developer or specialist planning consultancy) will at its own cost apply for and use reasonable endeavours to obtain planning permission.
- Once planning permission has been obtained, the land will be marketed for sale and the landowner will be obliged to sell.
- The promoter will then receive a fee out of the sale proceeds – usually a percentage of the net proceeds plus reimbursement of the promotion costs which it has incurred.
Advantages of a Land Promotion Agreement
A land promotion agreement can have certain advantages for both parties over a more traditional option for the developer to buy the land, which are as follows:-
- From the developer’s point of view, they do not have to buy the land in order to achieve a profit.
- There is more flexibility about the timing of a sale once permission is obtained – the parties may, for example, agree to delay a sale if market conditions are likely to improve.
- If the land is marketed properly, then the landowner can be sure that they will obtain the best price reasonably achievable for the land.
- The promoter and landowner should both have a common interest of achieving the best price. This is in contrast to an option agreement where the landowner will argue for the highest possible price whereas the developer will seek the lowest price, which can lead to a great deal of time being spent arguing about “market values”.
Dangers for the Landowner with a Land Promotion Agreement
Key points which a landowner needs to watch on a promotion agreement include the following:-
- Length of the agreement – this is important as during the agreement, the landowner is not permitted to pursue other opportunities. Note that there is usually provision for the original period of the agreement to be extended if there is a pending planning decision/appeal at the end of that time which allows for a further period to achieve a sale. It may therefore be quite some time before the landowner receives any money.
- Planning process – a landowner will usually want to have some input into the planning application. Will the application be for the whole of the land or only part of the land? If it is only part, what will happen in respect of the remainder of the land? Can the application include land belonging to others? If so, this makes the application and any subsequent sale much more complicated. The agreement should also provide that the promoter should appeal against a planning refusal if there is more than, say, a 60% chance of such appeal succeeding.
- Sale process – it is very important that the landowner is happy with how this is to be handled. The agreement should make it clear:-
- Whether a sales agent is to be appointed and, if so, who that will be or whether there will be a tender process.
- Whether a minimum price can be included as a “safety net” for the landowner.
- Whether the landowner can be obliged to accept a sale in tranches or with some deferred consideration.
- If the landowner has retained land, whether rights for access or services to the retained land be included in the sale transfer.
- If applicable, whether the landowner can retain a ransom strip between any adjoining third party land which may be developed in the future.
- Promotion costs – usually a landowner will want to include a cap on these. Alternatively, the parties may agree that the promoter is not reimbursed their promotion costs but receives a greater percentage of the sale proceeds.
- VAT – the promoter will need to charge VAT on its promotion fee. The landowner will not usually be able to recover such VAT unless it has made a “VAT election” in respect of the property.
- Capital gains – the landowner should take advice on the likely tax payable on a sale before signing a promotion agreement as there may be ways to mitigate this (e.g. by transferring the land into joint names, or by agreeing provisions with the developer to defer the sale of part of the property).
- Vacant possession/third party rights – the agreement will provide that the landowner must be able to sell the land with vacant possession once permission has been obtained. Any tenancies must therefore be properly documented as farm business tenancies or similar arrangements which include provisions for the landowner to regain possession on relatively short notice.
- Fees – the promoter will not usually pay the landowner a fee for entering into the agreement but will usually be responsible for the landowner’s legal and agent’s fees in connection with the agreement. It is very important that the landowner takes proper professional advice before signing the agreement – it will be too late to argue about these points once planning permission has been obtained.
- Competing sites – the landowner may wish to include a provision that the promoter will not seek to promote other sites in the immediate vicinity, otherwise an unscrupulous developer could use a promotion agreement to prevent a landowner from putting forward a scheme which may prejudice one of its existing potential developments.
If you are thinking about entering into a land promotion agreement and want specialist advice, please give Eleanor Rattay a call on 0116 281 6224