What are the pros and cons of selling through Land Promotion Agreements?

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Development land is a highly prized commodity these days. If you are a landowner with surplus land and are looking to sell, now may be a good time take advantage of the commercial opportunities offered by housing development.

There are different ways of selling your land to a property developer, with Land Promotion Agreements emerging as a very popular choice for both landowners and developers. Let’s take a closer look at what’s involved.

What is a Land Promotion Agreement?

Rather than a straightforward land purchase transaction, a Promotion Agreement might be viewed as a type of joint venture between the landowner and the developer, with the joint aim of maximising the value of the land to the benefit of both parties.

Once an agreed initial premium has been paid by the developer on completion of the Agreement, the developer is committed to promoting the site for planning, with all the associated risks of obtaining planning consent. When permission has been granted, the developer will market the property and the net proceeds of sale are shared between the developer and the landowner.

The respective shares received will reflect the level of risk taken by the developer to get planning permission, the value of both sides’ contributions and the sale price or market value. It will also take into account the initial premium paid as well as any costs already incurred by the developer.

Promotion Agreement Pros

The beauty of a well crafted Land Promotion Agreement is that it should be attractive to both parties. The Agreement allows the site to be sold at the maximum market value, generating an optimum return on investment for both the landowner and the developer.

This is in sharp contrast to an Option Agreement, a common alternative form of structuring a land sale deal. With an Option Agreement, the developer reserves the right to buy once particular conditions (usually revolving around planning consent) have been met. In doing so, the developer will wish to obtain the land at the lowest possible price and achieve maximum returns. The landowner, for his part, has the relative certainty of a buyer without having to bear the burden and risks of going through the planning process. However, it is easy to see how tensions over finances can quickly arise.

With a Promotion Agreement, the developer is not only highly motivated to achieve the most valuable planning permission he can get, he will also be keen to keep costs to a minimum, since these constitute a percentage of the overall value and will affect his share of the proceeds of sale.

Once planning consent has been obtained, the site is put on the market and sold to the highest bidder, with the actual sale price (rather than a hypothetical market valuation) being used to determine the percentage shares between the parties. Everybody wins, no?

Promotion Agreement Cons

A Land Promotion can work well for all concerned, but it’s important to watch out for pitfalls that could jeopardise the deal. Potential disagreements between landlord and developer largely revolve around the exact timing of the land sale. In an unfavourable economic climate, the developer may wish to proceed with the sale as soon as possible after obtaining planning consent, even though the market is weak. The landowner, on the other hand, may prefer to wait until land prices have recovered.

What’s more, unless there is a mechanism in place to define and restrict the amount of costs that can be incurred by the promoter, the landowner could see his share of the proceeds tumbling. There is otherwise no incentive for the developer to cap his spending since he has the certainty of full reimbursement when all costs incurred are deducted off the final sale price.

VAT is another potential pitfall that could leave the landowner seriously out of pocket. Assuming the promoter charges VAT on his share of the proceeds, but the landlord is unable to claim the VAT back, a Promotion Agreement may not work for the landowner at all. Instead, he may prefer to sell via an Option Agreement where VAT issues do not arise.

But there are risks for the developer too. What if the landowner has a change of heart or, for whatever reason, cannot proceed with the Agreement? The promoter will reasonably want to protect the not insignificant outlays incurred just in case something goes wrong.

Securing the landowner’s obligations under a Promotion Agreement could take one of two forms. The developer could take out a residual option to buy the land in case the landowner refuses to sell on the open market. The sale price would have to take into consideration any account planning costs incurred and a share in the value increase of the development land. Another way forward would be for the developer to take a first legal charge over the (unencumbered) property, giving him the ability to exercise a power of sale, should it come to it.

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