When land is ripe for redevelopment there are various options open to a landowner as to how to maximise return on the property.
But which is best?
The low-cost option could be for the landowner to obtain planning itself and appoint a builder to build out.
However, the landowner may not have the necessary expertise, nor want to risk incurring wasted costs if planning proves difficult to be obtained.
The landowner could try and tie a developer into a conditional sale agreement, which imposes an obligation on the developer to buy the land, if planning is obtained.
However, this option is unlikely to be attractive to a developer if the planning position is uncertain and the project’s profitability cannot be identified easily.
Option agreements are, therefore, most commonly used and most landowners are familiar with this model.
But, they do not give the landowner any certainty.
For instance, what if the option is never exercised?
The land will then have been tied up for nothing. On the other hand if the option is exercised, in the case of an open market value price, how easy will it be to agree the final price?
The parties might end up having to refer the matter to arbitration, which could take years.
In addition, the landowner may have concerns about the developer ‘flipping’ the site on for immediate profit, meaning it might have to think about imposing additional overage (clawback) provisions.
Could a promotion agreement be the answer?
Promotion agreements are usually entered into by a ‘promoter’ developer, rather than a housebuilder.
Frequently these are for longer term projects and for sites without short-term planning potential.
They can be suitable for more complex planning situations and are often, but not exclusively, used for residential development.
The promoter agrees to promote the land within the context of a local development framework plan.
The promoter applies for planning permission and is responsible for these costs. Upon planning permission being granted, the promoter funds marketing the land for sale.
Once a buyer is secured the landowner is then obliged to sell. On completion, the promoter receives a fee which is usually a percentage of the net sale proceeds, after deduction of the promotion costs.
The amount of the percentage will depend on the level of risk being taken.
Promotion agreements are attractive to developers because they do not have to raise finance and buy the property themselves or, in fact, have any associated SDLT costs.
What are the advantages to the landowner of proceeding this way?
- Use of the promoter’s expertise and skills
- The promoter does all the leg-work
- Collaborative; a better balance of power than in option agreements where the landowner is obliged to sell but the developer not obliged to buy
- Both parties have a common interest to achieve the best price, unlike an option where the developer and landowner are pitted against each other to agree the final price
- no up-front costs for the landowner as the risk is outsourced
- the burden of spending out seeking planning (perhaps unsuccessfully) is on the promoter
- it is in the interests of the promoter to keep costs down, in case they cannot be recouped
- costs are only effectively paid in planning which is granted and the subsequent sale.
- The promoter has an interest in minimising planning gain, as this directly affects the ultimate profit.
- Best price if the land is marketed properly:
- not tied to a fixed price in a fixed price option
- not based on an ‘open market valuation’ which does not actually test the market and makes certain assumptions which may not reflect reality (e.g. a special purchaser)
- with option agreements a referral to an expert, in the event of a dispute, can take a very long time.
- Flexibility on timing, the parties may delay if market conditions are not good.
- May remove the need to have complex overage provision to protect the landowner against the developer ‘flipping’ the site.
- Common interest means that the promotion agreement may be easier to negotiate, depending on complexity.
Property can still be marketed, even if not desirable to that particular developer. Whereas, a developer may not buy in the case of a fixed price option.
- Usually no initial fee, unlike an option
- Term of agreement are likely to be longer, comprising the original period for planning plus a marketing period.
- Land ‘tied up’ as in an option, as opposed to the landowner seeking planning itself. The goals therefore, need to be realistic.
- The landowner will be bearing most of the planning costs, in contrast to a fixed price or, potentially, an open market value option, when the landowner is protected by a minimum price.
- Actual sale of property is delayed whilst marketing unlike the option agreement where a time limit may be imposed on the developer to exercise its option.
Will the landowner get the best price?
Only if an actual buyer is found!
Having decided to go the route of a promotion agreement, what does the landowner need to think about?
The promotion process
It is best for the the landowner to identify a promoter with relevant local knowledge, contacts, expertise and track record to ensure the promotion agreement has the best chance of a successful outcome.
The agreement should set out clear objectives and obligations on the promoter to maximise value, minimise planning gain, minimise affordable housing.
A clear and realistic timescale is also required.
The agreement requires an explicit termination clause for if the promoter is not complying and there is no real prospect of a successful outcome.
The landowner must decide what control it requires over the planning process, particularly if land is being retained.
What exactly is being sought?
Should the landowner require approval of applications and agreements, will the promoter be obliged to appeal, what other land is to be included (may be part of a larger project)?
If there is a danger the promoter might also be dealing with competing sites which could prejudice the likelihood of a successful outcome, the landowner should secure the promoter’s agreement not to market competing sites.
The danger is the sale could be prejudiced by the promoter spreading its bets or deliberately tying up a site.
The landowner should consider the control it has over the costs incurred by the promoter, which will ultimately be deductible against the sale price.
Therefore, the costs should be reasonable, possibly with caps on certain costs and some should require the prior approval of the landowner.
They should not include the promoter’s internal costs. If the promoter objects to this, it might be preferable to suggest the costs are simply included in a higher percentage of the sale price given to the promoter.
This might give the landowner more certainty.
The parties need to decide who appoints the agent in the sale process. The landowner might have its usual land agent, but a promoter may also have its own preferred or related agent.
A crucial aspect of the promotion agreement will be whether the landowner is to be protected by a minimum price so that it is not forced to sell, in the case of a poor market at the time of marketing.
This could be expressed as a price per acre or an overall minimum initial price.
How will a sale be structured? In the case of larger sites there may be sales in tranches.
If that is the case, the parties will need to think about when the promoter’s costs are recouped, whether on the first sale or apportioned over the site?
The onward buyer may wish to defer some of the consideration. How might this impact on the selling landowner’s tax position (see below)?
With larger development sites the parties might agree that the promoter carry out certain infrastructure works to maximise sale potential.
However, such works might trigger Community Infrastructure Levy payments. It might, therefore, be of greater advantage for the first buyer to carry out the works instead.
If the landowner is to retain any land, either for its own use, or future sales, what rights are to be reserved over the land sold, to protect the future use and development of the retained land so that is not ‘sterilised’?
The landowner might also want to consider further protection such as ransom strips and overage, and how the benefit of these might be split.
Will the promoter also get a cut?
The landowner needs to be able to carry on using land freely during a lengthy promotion period, which may include letting the property.
However it needs to ensure that any tenancies allow vacant possession to be given at the appropriate time.
It should review farm business tenancies and licences and make sure that they are up to date and properly documented.
An option or pre-emption in addition?
Some promoters might ask for an option or pre-emption to be included in the promotion agreement, so that it has the ability to buy the property itself once planning is obtained.
Landowners should be wary as to whether advantages of going the promotion agreement route might be lost. Is there a danger of the promoter selling on the site immediately, at a profit?
How easy will it be to demonstrate the value of the site if it cannot be properly exposed to the market due to the promoter’s pre-existing rights?
Stamp Duty Land Tax
As the promoter will not actually acquire the land itself, it will not have to pay SDLT.
The promoter will need to charge VAT on its promotion fee. Therefore, the landowner may wish to make a VAT election to recover the VAT.
This could make the site less attractive to a subsequent buyer, but for most it should just be a cash flow issue (although it does impact on the amount of SDLT payable).
The landowner will need to check the structure of the payment of the sale consideration.
For instance, where there is deferred consideration it gives enough cash up-front to cover initial tax bills. It will also need to consider the impact of entrepreneurs’ relief.
In each case, the landowner should ensure it is getting appropriate tax advice from its accountants.
Joanne Spittles is an LLP Partner and part of the development team at Paris Smith LLP, advising both landowners and developers on complex and straightforward matters.
Joanne is an experienced property lawyer who is quick to respond with an eye for detail. She is a partner within the Property department.
Her broad range of clients, both large and small, include property developers, landlords, investors, occupational tenants, housing associations, lenders, educational and charitable establishments and private individuals.
She has built up particular expertise in dealing with complex property development matters including promotion agreements.
She is the company secretary (on a voluntary basis) of the New Forest Enterprise Centre.
- Land assembly
- Conditional contracts
- Overage agreements
- Joint ventures and promotion agreements
- Planning and infrastructure agreements
- Development agreements
- Lettings and disposals
- Landlord and tenant