Landowners selling land for house building should consider promotion agreements

Until recently, landowners fortunate enough to be selling land for housebuilding almost invariably entered into a so-called option agreement with a housebuilder, giving the housebuilder the option to buy the land at a discounted price once planning permission had been secured.

But according to the new edition of Land Business, a publication circulated to 14,000 landowners and their advisers, any landowner with a significant block of potential building land to sell should now be considering a promotion agreement rather than a traditional option.

Roger Pryor of Strutt & Parker’s residential development department, explains: “The problem with the traditional option agreement is that the interests of the two parties are clearly and totally misaligned. The landowner wants to sell his land for as much as possible, while the housebuilder wants to buy it for as little as possible.”

This mis-match is so obvious that option agreements are often wrapped in additional terms and conditions, but these don’t always achieve what they set out to and invariably result in more paper-work and higher legal fees.

With valuers usually erring on the side of caution, the so-called market value of a site can be distinctly on the low side under an option agreement and as a result some landowners could be missing out on millions of pounds, warns Mr Pryor.

Happily, there is an answer: a promotion agreement. Here the landowner enters into an agreement with a specialist promoter. As with an option agreement, the promoter takes on the risks and costs of securing planning consent but he does so in exchange not for a discount to agreed market value but for a percentage of the actual selling price.

“That’s the key difference,” explains Mr Pryor: “Under a promotion agreement, the land is sold once planning permission is secured. Both parties are interested in that selling price being as high as possible and if there is one buyer prepared to pay over the odds, perhaps to complete a larger site, then both landowner and promoter benefit.”

Mr Pryor believes the benefits of promotion agreements are significant. Indeed, he knows of one recent example in the south of England where, on an 8 acre site with consent for 200 homes, a landowner was £2.5 million worse off thanks to the clauses of a traditional option agreement than he would have been with a promotion agreement structure generating an open market sale.

Strutt and Parker, 27.07.2006

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