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A comeback for option agreements?

Planning promotion agreements (also known as land promotion agreements) have become increasingly popular among landowners and developers in recent years. Could options now be making a comeback?

Promotion agreements v option agreements

Under a typical planning promotion agreement, a developer agrees to promote a landowner's property for development. This involves the developer applying for and pursuing planning permission and, having secured planning permission, marketing the property for sale in the open market. In return for providing these services, the developer receives a fee or a proportion of the net sale proceeds after the various costs incurred in the promotion have been deducted and reimbursed to the developer.

The most commonly recognised advantage of a promotion agreement is the fact that landowner and developer interests are closely aligned, as it is in both parties' interest to achieve the highest price possible in the open market. From a developer's perspective, promotion agreements also have the advantage of the developer never owning the property and the tax, practical and other considerations that this entails.

However, option agreements often offer a simpler and more stream-lined method for developers to acquire an interest in a site and there are a number of reasons for this reckoning:

  • Promotion agreements often require a much greater degree of landowner involvement in the promotion process, which can involve additional time and cost; 
  • There is often a debate as to which party is best placed to lead the marketing and sale process. The developer will argue that they have the expertise and market awareness to drive these processes, whereas the landowner may feel that, because they stand to receive a greater percentage return from sale proceeds, they should have greater control. This debate and tension can be time-consuming and mean that developers are not able to have as much flexibility to deliver what is required to maximise overall returns; 
  • Landowners can suffer detriment in having to wait longer for their return, because planning will need to be obtained and an ultimate purchaser lined up, whereas options can be exercised by a developer at an earlier stage.

The advantages of option agreements

An option agreement (where the landowner typically grants 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)) in return for an option fee, can present the following advantages: 

  • An option agreement gives a clearer VAT position to landowner and developer - it is less likely that a landowner will suffer irrecoverable VAT on an option;
  • Options can also provide greater certainty of purchase price particularly where they include a minimum or fixed price, or where the option includes a standardised method of valuation, e.g. by reference to the Red Book; 
  • Options can also be a more effective and flexible method of piecing together phased strategic sites, where a critical mass of land is required to be under control before development can commence or sales complete. Lining up options in this way can be simpler for developers to effect and manage than stacking up an equivalent number of planning promotion agreements. The developer can always exercise on an option, even where onward sale is not yet identified, particularly where the agreement term is running out or planning timescales are critical; 
  • The developer will usually have more discretion on whether or not to purchase the site under an option agreement. A promotion agreement will be far more prescriptive and onerous in the developer's obligations as to what it must do and mustn't do and limits the ability to be nimble; 
  • It is possible to protect developer's interest in an option at HM Land Registry as it is a land interest, rather than a contractual interest. This has the additional benefit of being more easily understood by lenders as well.

Future developments

 

It is fair to say that the pros and cons of each approach will continue to be considered as appropriate on different sites and each approach, sometimes a blended approach, will be the best route to a consent depending on the specific instances. What is clear though, is that it is no longer simply the case that the market is seeing options as pro-developer and promotion agreements as pro-landowner; the subtleties and different advantages of each approach could be behind a resurgence in option agreements in the strategic land market.

Partner Thomas Hall and senior associate David Goy are strategic land advisers in the residential development team at Shoosmiths LLP.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

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