What is the difference between an Option Agreement and a Promotion Agreement?
If you’ve made the decision to sell your land to a developer, you may be unsure of the best way to proceed to enhance the value of the land.
There are two main ways to move forward with a land sale – an option agreement and a promotion agreement.
Here, we discuss the two and the circumstances in which each are used.
What is an option agreement?
An option agreement is a way for landowners to realise an increase in land value without having to first obtain planning permission. Option agreements are the most common form of land transaction and involve the developer applying for Planning Permission (at their own cost) during an agreed period (usually 5 – 10 years). The advantage to the landowner is that the risk and cost of applying for planning permission is taken by the developer. One disadvantage is that there is no onus for the developer to buy the land, and in the event that planning cannot be achieved, the landowner may not be any further towards realising a sale, even though it may be some 5 years plus down the line. As the land is effectively tied up by the developer during the planning process, it could be viewed that the landowner loses control of the land, and therefore the ability to do anything else with it during this period, without having received any money.
The sale of the land will usually go ahead once planning permission is received, although the option to buy the site can be exercised at any point during the agreed period.
What is a promotion agreement?
In a promotion agreement, the promoter (usually a developer) will agree to promote the land at its own cost and apply for planning permission and the landowner is contractually bound to sell the land. Once planning has been granted, the developer will market the property and share the net proceeds of sale with the landowner according to a pre-agreed percentage split.
In this type of agreement, both parties share the aim of wanting to maximise the value of the land as it is of mutual benefit.
A promotion agreement allows the landowner to retain some level of control over the land through the sales process. One downside is that the landowner will have to bear some of the cost of securing planning permission, as these fees are usually deducted from the sale proceeds before being divided between the parties.
There is no hard and fast rule on which type of agreement is best and it will depend on several factors, including the location of the land, its planning potential, its size and potential value. Other considerations include how much risk the landowner is wanting to take, how much involvement they want in the process and how quickly they want to realise some money from the sale.
Lea Hough has a specialist team offering advice on planning and land development. We can work with land owners from the very early stages of preparing for sale, providing advice relating to the circumstances involved and the best route to sale. Our team’s experience also affords us a good position to consider the best strategy to market land to developers to achieve the best sale price for our clients. For more information, please get in touch.BACK TO NEWS