Option and Promotion Agreements

Option Agreement or Promotion Agreement? Rosemary Edwards, Head of Residential Development, gives us her thoughts.

Legally, what are Option Agreements and Promotion Agreements?

Under an Option Agreement, the land owner typically gives a developer the right to buy the land, either at a fixed price or by reference to a formula (such as a percentage of market value). The developer will usually take on various obligations (such as to pursue planning permission) and may pay an option fee.

Landowners may sometimes wish to use a Put and Call Option for tax reasons. Such an arrangement, as well as giving the developer the right to buy, also entitles the landowner to 'put' the land on the developer, obliging the developer to buy it.

A Promotion Agreement may contain similar obligations (such as to pursue planning permission), but does not give the developer the right to buy the land. Instead, the developer would be entitled to a percentage of the sale proceeds as and when the land is sold.

Which is better for the land owner?

That depends on the circumstances.

It is sometimes said that a Promotion Agreement is better for the land owner, because he is working side-by-side with the developer. They both have an incentive to maximise the sale price. Under an Option Agreement, the developer may secure planning permission, but then try to argue the price down, so that he pays less.

That may over-simplify things however. If the option is at a fixed price anyway, then that tension would disappear. If the option is by reference to a market value formula, the developer cannot simply impose his view of the market value – if the parties do not agree, it would normally go to a third party for determination.

What this does show is that each situation needs to be considered individually, depending upon the circumstances and intentions of the parties.

Are there are any other alternatives open to land owners?

Yes, the land owner does not need to enter into an Option Agreement or a Promotion Agreement. He could run the planning process himself and then sell the land with the benefit of planning permission, to the highest bidder at the time.  He needs to be careful about this. The cost of pursuing planning permission will normally run into tens of thousands of pounds and can sometimes amount to hundreds of thousands. A land owner may need a lot of nerve and deep pockets!

By entering into an Option Agreement or a Promotion Agreement, the land owner can pass those obligations on to a developer, who will undertake them at risk, normally in exchange for a fixed discount against open market (under an Option Agreement) or a share of the proceeds of sale (under a Promotion Agreement).

Another choice might be for the land owner to do nothing. That may seem a strange thing to say, but it might just be appropriate where the land is a key part of a larger scheme and the land owner is confident that other parties are doing everything necessary to secure planning permission for the wider scheme. That can be a very dangerous course however, as the land owner may find that his interests are not properly protected or even that his land does not prove to be as important as he expected. He could find that the development is built around him and none of the development value is realised.

All of this shows the importance of taking proper professional advice at an early stage, to decide which course is most appropriate. That can be a mix of advice from a lawyer, surveyor and/or planner. We can co-ordinate that advice and are always happy to have a preliminary chat with land owners, without any obligation.

How do these comments apply to developers?

In many ways, the developer’s position mirrors that of the land owner. Many of the same considerations apply. Often, developers will prefer Option Agreements, because their main concern is to secure land for development.  Under a Promotion Agreement, the developer may take a share of the proceeds, but the land is sold on in the open market to someone else. Some form of hybrid agreement may be possible, especially on large sites, that gives the developer the chance to buy at least some of the land.

Our team

Rosemary Edwards

Partner

Head of Residential Development

Direct Line +44 (0)113 297 7724

Tim Halstead

Partner

Residential Development

Direct Line +44 (0)113 297 7720

Kathryn Wood

Associate

Residential Development

Direct Line +44 (0)113 297 8937

Lucy Welch

Solicitor

Residential Development

Direct Line +44 (0)113 297 8059

Amy Lees

Solicitor

Residential Development

Direct Line +44 (0)113 297 8939

Emma Speight

Solicitor

Residential Development

Direct Line +44 (0)113 288 2812