Development of land using promotion agreements
Peter Robinson, Partner
This is the first in a series of articles on aspects of the development of land, largely from the perspective of a landowner. The idea for the subject matter of this article came from a round table discussion with surveyors with whom Hunters works closely in managing and disposing of rural estate land for clients.
Introduction
The sale of land for development is commonly undertaken by way of either the exchange of an agreement under which :
- the completion of the sale of the land is conditional upon a planning consent being obtained ; or
- by the landowner (‘the Owner’) granting to the buyer an option (exercisable only by the buyer) to buy the Owner’s interest in the land once the required planning consent has been obtained and become capable of implementation
In recent times, however, more sales of development land are being facilitated by ‘promotion agreements’ (‘PAs’). This article examines whether PAs are a more suitable means of Owners disposing of land for development than by way of option agreements (‘’OAs’’).
Comparison of OAs and PAs
Both OAs and PAs will be used where an Owner has land which may be ripe for development but where planning consent needs to be obtained. Once an implementable planning consent has been obtained, the value of the land will increase from that of its current use. The Owner’s objective is, therefore, to negotiate a sale price which reflects as much of that increased value at the point of sale as is commercially justifiable.
OAs and PAs generally differ in the following ways :
| OA |
PA |
| The parties to the agreement |
| The option is granted to a buyer who contracts to acquire the Owner’s land once the requisite planning consent is obtained. In general such buyers will develop the land itself and sell on the completed development. |
A promoter will be appointed by the Owner, effectively, to project manage the process of obtaining planning consent and then arranging for the further development or part implementation of the planning consent and the ultimate disposal. |
| Means of disposal of the Owner’s interest in the land |
| The buyer acquires the Owner’s interest by exercising an option to buy once the required planning consent has been obtained and is capable of implementation. |
The Owner retains his interest in the land after the required planning consent has been obtained and is capable of implementation and then sells to an agreed third party (who may be the promoter). |
| Price |
| The price is generally determined at the point that the OA is entered into either by way of a minimum price for the land (which may be subject to increase by indexation to the completion of the sale) or a percentage of the open market value of the land with the benefit of the planning consent (traditionally 85% of that value). In either case the buyer may also be allowed to deduct his costs of obtaining the planning consent from the agreed price. |
The price is only determined once the process of obtaining an agreed planning consent has been obtained and a strategy for disposing of the land with the benefit of that planning consent has been agreed. The PA will probably stipulate a minimum value below which the Owner could not be compelled to agree to a disposal. |
| Control |
| The buyer will generally, from exchange of the OA, take overall responsibility for obtaining the required planning consent subject to commitments to the buyer to use reasonable endeavours to do so. |
Whilst the promoter will, generally, initiate the preparation of the planning application, the progression thereof and the planning of the disposal procedure. The Owner retains a greater level of control of the entire process by means of retaining a right of approval to these procedures. Both promoter and Owner are, however, subject to agreed objectives throughout the planning and disposal stages. |
Advantages of PAs
Flexibility
English property law is not renowned for its flexibility. PAs are, however, more flexible. PAs can be drafted so as to commit the Owner to an eventual disposal but without, at the point of exchange, having the pre-determination necessary for OAs as to what the planning consent needs to be, who the eventual buyer will be and what the eventual disposal price would be ;
Control of the planning process
Under OAs the buyer will generally, subject to a limited rights of the Owner to control that process, make and progress the planning application and to decide whether or not the terms of the planning consent is acceptable.
Under a PA, the Owner has a much greater say in the development of the planning application and its progression. An Owner can, therefore, react and influence decisions arising during the planning process to a greater extent than under an OA
Control of design
The principle objective of an OA is to achieve satisfaction of any planning condition precedent in order to realise the sale and payment of the sale price to the Owner. Therefore the terms of the planning consent required has to be identified at the point that the OA is entered into and, by and large, will remain unchanged for the period (generally of some years) during which the OA remains in existence. Because the Owner will have little control of the process by which the planning consent is implemented (particularly if the planning consent is an outline grant and consents to outstanding design issues are dealt with by the buyer post-completion)
Under a PA, the Owner ‘remains in the game’ until well after the required planning consent is obtained and can influence the implementation of the same as part of the disposal process which should be contemplated by a well drawn PA. Therefore, for instance, an Owner could agree to part implement a planning consent to design and install infrastructure particularly where such infrastructure would serve the Owner’s retained land as well as the proposed development.
PAs – a more preferable means of disposal of development land by Owners ?
The relative inflexibility of OAs is countered by the greater degree of certainty which they bring an Owner. Although OAs leave the decision as to exercise of the option granted to the buyer, it is unlikely, in practice, that a buyer will not exercise the option once planning consent has been obtained. By contrast, PAs leave the contractual commitment – even on a conditional basis – to be secured by a process set out in the PA. The risk associated with finding a buyer is, under a PA, left with the Owner until much later than would be the case under an OA.
PA’s also require a much greater investment by the Owner both in terms of the professional costs of the Owner in settling and exchanging the PA and in the process of implementing it. Therefore the use of PAs might depend on the value of the underlying disposal project being sufficient to justify that additional expenditure.
Ultimately the choice of PA over OA may well come down to the level of return that the Owner will be left with once the land has been disposed of. In that sense, however, ‘return’ may to some Owners be the ‘’look and feel’’ of the completed development arising from the disposal. That alone may justify the adoption of a PA.
