We have looked at the two most used contracts between an owner of land and a developer, being a conditional contract and an option. Both have many aspects to them where the draftsman must find a compromise between the competing interests of each party. Is there a form of contract where the interests of the parties can be more aligned? Yes, that is a promotion agreement.
Why is such an agreement different from the other choices of contract? It is argued that both the owner and the developer will want the best planning outcome and the best price to be achieved for the land, as the arrangement between them is that the objective is a sale to a third party and they share the proceeds. Both want all the elements that lead to the best price being realised to be aligned. These include not only getting the most valuable planning permission but also the land being parcelled up in the most attractive fashion for the market and there being an agreed marketing strategy to realise the best price.
Is this almost too good to be true? Well, there are various elements to such a deal where the interest of the parties diverges, but these interests don’t go to the fundamental objectives. How the proceeds of a successful sale are split in percentage terms needs to be agreed. The more risk assumed by the developer the higher its percentage one would argue.
What are the other potential issues where compromise is still needed? The developer will want to recover as soon as possible what are likely to be the significant costs it incurs in pursuing a planning permission. The developer risks all of that investment but, if successful, will seek to take those costs from the first sale in priority to the division of the proceeds. Such costs are usually capped to give some certainty and as a protection for the owner from losing too much of their share of the price. There will be tax to pay and the owner needs cash to pay it.
Within the contract there will be a balance of control to be agreed between the parties. Do all the steps have to be agreed or can the developer take the lead and make the decisions, acting in accordance with the stated objectives in the contract? Can there be a let out for either or both parties if the strategies aren’t producing results? Does the owner have to accept whatever the land is worth on the open market at the time of sale or is there a minimum threshold?
How long does this arrangement run? Both parties will want to give a generous time to getting planning permission. Once the land has a permission, is it in accordance with the objectives? Does it seek to maximise the value of the land and carry as few financial and other burdens as is reasonable in the circumstances of the planning policies? The developer will be keen to recover its costs and want to proceed with a sale. The owner might want further planning work, an appeal or variation to add value. The contract should deal effectively and fairly with this scenario.
What if there is no active market at the time of sale? Does the contract run on until all the consented land has been sold, no matter how long that takes?
The fee payable to the developer under a promotion agreement is a service and an invoice will be prepared. It is highly likely that VAT will need to be charged which will add currently 20% of the fee to the share taken by the developer. If the owner is not registered for VAT and the land has not been elected to be taxed for VAT, the VAT paid on the invoice will not be able to be recoverable.
The following articles will look at the common legal problems encountered which may adversely affect the development potential of land, and how to overcome them.