Option or Promotion Agreement, which is best?

As a landowner with land suitable for development you typically have two arrangements you can enter into with a developer or planning specialist, but how do these agreements differ and what one's right for you?

For those looking to unlock the development potential of their land, entering into an arrangement with a developer or promoter is probably the most effective course of action, especially if time, experience or money is lacking to fund the promotion and planning application themselves.

By far the two most popular arrangements landowners can enter into are an Option Agreement or a Promotion Agreement. The former was standard for many years, while the latter has only more recently come to the fore.

Taking the Option Agreement first, this is an agreement between a landowner and most usually a developer, in which the developer has the right to buy the land within a specified timeframe (five to ten years is the norm) providing certain conditions are met. These conditions, most significantly applying for planning permission, are undertaken at the developer's own cost, and once met to a satisfactory standard, the developer may then exercise their option to purchase the land. The price of the said land can either be negotiated once planning permission is granted or fixed at an agreed minimum figure.

A Promotion Agreement, meanwhile, is where the landowner enters into an arrangement with a planning specialist/promoter (not usually a builder or developer) whose job is then to promote the landowner's land through the planning process in order to gain planning permission. Once granted, the landowner and promoter work together to market and sell the land to a developer. In this agreement the landowner is legally bound to sell the site and all proceeds are divided on a pre-agreed basis between themselves and the promoter.

There are advantages and disadvantages to each type of agreement and a landowner needs to assess what's most important to them when selling their land. With an Option Agreement, for example, a disadvantage is that once planning permission has been granted, the interests of the developer and the landowner become misaligned, with the developer wanting to pay the least they can for the land while the landowner wants the best price possible.

However, with a Promotion Agreement the landowner and promoter will work together to achieve the best price possible for the land, which, because it is sold on the open market, is subject to a competitive bid process.

But with an Option Agreement the landowner does get to personally choose the developer they propose to sell their land too. This can be an advantage, especially if the landowner lives in close proximity to the land in question and has an opinion on what they want the eventual development to look like. In addition, the landowner may prefer to work with a specific developer whose business approach and ethics are a good fit.

Conversely, with a Promotion Agreement, the promoter can compel the landowner to sell the land, providing certain conditions have been met. This can be a disadvantage as the developer may not be the landowner's preferred bidder.

Whatever scenario a landowner is leaning towards, the fact is that through good negotiation and careful drafting, many of the disadvantages of each type of agreement can be mitigated and a positive outcome can be secured for all parties.

The Land & New Homes team at Butler & Stag has a wealth of experience in dealing with both Option and Promotion Agreements, so if you are a landowner who is interested in unlocking the development potential of your land then do please get in touch.