This guide tells you everything you need to know about Promotion Agreements.

Introduction to Promotion Agreements

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?

Table of Contents

What is a promotion agreement?

What are the advantages of a promotion agreement for the landowner?

What are the disadvantages of a promotion agreement for the landowner?

What does the landowner need to think about? – The Promotion Process

The onward sale

Vacant possession and third party rights

Taxation Points

About the author

 What are promotion agreements?

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 of a promotion agreement for the landowner?

What are the advantages to the landowner of proceeding this way?

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.

 What are the disadvantages of a promotion agreement for the landowner?

Will the landowner get the best price?

Only if an actual buyer is found!

 What does the landowner need to think about? – The Promotion Process

Having decided to go the route of a promotion agreement, what does the landowner need to think about?

The promotion process

What exactly is being sought?

This might give the landowner more certainty.

 The onward sale

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.

Will the promoter also get a cut?

 Vacant possession and third party rights

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?

 Taxation Points

Stamp Duty Land Tax

As the promoter will not actually acquire the land itself, it will not have to pay SDLT.

VAT

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).

Capital Gains

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.

 About the author

Joanne Spittles is a 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.

Expertise: Property