Strategic land promotion is likely to maintain pace and landowners with land on the edge of cities, towns or villages in the South West may find themselves approached by promoters or developers. Promoters will ask a landowner to enter into an option agreement or a promotion agreement.
Option agreement or promotion agreement what’s the difference?
Generally these documents are similar in terms of the obligations placed on the promoter to promote the land and use their expertise to attempt to get a satisfactory planning permission (“SPP”). The cost of promoting the land will be borne by the promoter and will be at the promoter’s risk should the option not be exercised or the land is not sold to a third party pursuant to the terms of a promotion agreement.
Pursuant to an option agreement, once a SPP has been granted, the developer/promoter can exercise the option and buy the land either at a fixed price or at a discount to market value having deducted the promoter’s costs and any option fee paid to the landowner at the outset. Here the promoter will be keen to pay as low a price as possible for the land and unless the parties’ agents can negotiate a price acceptable to both parties, the determination of the price can end up with an arbitrator or expert which, of course, will have a cost.
With a promotion agreement, once a SPP has been granted, the promoter has to market the site and try to find a suitable purchaser. Once the site is sold the sale proceeds will be divided between the landowner and promoter. The promoter is entitled to a reimbursement of its promotion costs and a proportion of the net sale proceeds as its fee. Sometimes a promotor may also wish to include an option to purchase the property or part of it in a promotion agreement. In the case of a promotion agreement, the landowner’s interest is aligned with the promoter’s in that both parties wish to achieve the best price for the land.
Strategic land – key points for a landowner to consider
1. Do your due diligence on the promoter. Make sure you are happy with who you are contracting with – this is a long term relationship: initial option or promotion periods of 5 or 10 years (or even longer) are common.
2. Consider any key drivers for you. For example, is maximising the market value and net sale proceeds the overriding factor or are there other factors that are important to you?
3. Take advice from an experienced agent who can guide you through the process and negotiate fair heads of terms. A cap on promotion costs is crucial and it is highly desirable to agree a minimum land value/price.
4. Instruct solicitors to advise you on the heads of terms before they are agreed and to negotiate the option/promotion agreement.
5. Take advice from accountants/tax advisers as to the tax treatment of the transaction from the outset so that you understand what your tax liability is likely to be and when and where a tax liability will arise. How you hold your land will dictate the tax treatment. Further, if your land is being promoted in conjunction with other land and an equalisation agreement is entered into by all the relevant landowners, when your land is sold you will be liable for tax on the amount received for the land prior to distributing sums to the other landowners pursuant to the equalisation agreement. You may then receive an equalisation payment from another landowner when its land is sold. You may also be liable for tax on that payment.
6. Agree at heads of term stage an appropriate contribution to your legal and agent’s fees.The negotiation of an option or promotion agreement can take some months. It is a long and complex document and will be in existence for many years so it may take some time to formalise the document. The promoter will also undertake in depth due diligence on the land.