Promotion agreement or option agreement?
An arrangement in to sell your land is obviously likely to be an important financial transaction so you will want to be sure that the route you are choosing is the most appropriate. There are two primary possibilities:
- Promotion agreement
- Option agreement
Characteristics of promotion agreement
- The interest of the land owner and the promoter run concurrently at all times to maximise the profit of both.
- The promoter does all the work. The owner does nothing.
- The promoter does everything at his own cost.
- The promoter never controls the land in any way. The only safety feature for the promoter is the agreement itself. As you would expect, most of the words cover points where it is important that the owner does not contravene the agreement, for example by leasing the land to a local farmer for 20 years. The actual agreement is therefore largely about making sure that the promoter receives his agreed share of the ultimate selling price when the land is sold.
- The point of sale is the only time in the course of the agreement when the interests of the owner and the promoter may be different. The promoter will always want to sell as soon as his work is complete. On the other hand the owner may wish to defer sale for one of any number of reasons. However promotion agreement solves that problem. Normally, the promoter will insist on avoiding a delay in sale because to sell out with planning permission is the essence of the agreement.
- The agreement also has to cover the actual mechanics of sale. The process, the agents we use, and what happens if we don’t get the price we or you wanted?
Option agreement: advantages to land owner
- I will refer to the buyer of the option as the “optioner” and the landowner as the “owner”.
- An option agreement can be registered at the Land Registry. As a result, the option agreement is usually far simpler than a promotion agreement. That means there is a lower likelihood of disagreement. It is also true that most commercial solicitors have come across option agreements whereas the number who are conversant with promotion agreements is extremely limited.
- The exercise price of the option is usually fixed, either as a specific sum or by reference to some formula such as the increase in value achieved by the optioner. In any event, both sides are committed to a specific sum of money if the option is exercised.
- The seller has the comfort of knowing the outcome but does not usually have the chance of a sale at a higher price, as could be possible by using a land promotion agreement.
- The optioner does all the work. The landowner does nothing.
- The optioner does everything at his own cost.
- Once the option is in place, the landowner has the whip hand. He has neither power nor work nor worry. He/she simply sits it out until the option is either exercised or it expires.
- The greater the level of uncertainty in obtaining the desired grant of planning permission, the greater the benefit to the land owner of an option arrangement. Whatever transpires, the optioner has to bite the bullet and pay the exercise price or lose the cost of the option and all expenses. Conversely, in a promotion agreement, if it becomes clear that expectations will not be met, the interest of the parties continues on the same railway line to achievement of the fair value as the outcome.
- If the optioner is on the brink of the decision to abandon the option, there is no reason why he should not approach the owner to negotiate new terms whereby the optioner continues to work to achieve a satisfactory outcome for both parties.
- Neither an option agreement nor a promotion agreement will overcome the intrinsic delays in the planning process.
What is the difference to the optioner/developer?
The business of land promotion is to obtain planning permission as fast and efficiently as possible, to the maximum benefit of both parties. Speed is everything. Occasionally, the profit projections provided by the promoter before you signed the agreement, may not be achieved. You could blame over-optimism, but more likely, the promoter simply made the best decision he could in the ever-changing and ever uncertain world of finance and economics.
By contrast, an optioner/developer will be looking to make his primary profit from construction or property development, or both. Any increase in value from obtaining planning permission will certainly be useful but it will not be the prime purpose of entering into an agreement with you.
The developer will almost certainly prefer an option agreement. Although that will cost him more money up front, he is buying just a little more time. Far more importantly, the fixed purchase price enables him to plan the development project which is the real reason for his agreement with you. He would not be able to obtain investors or commercial finance without figures to illustrate the profitability of his proposal. The more specific those figures can be, the easier it will be to plan the project.
Incidentally, the cost to the land owner by way of reduction in net receipt at the end of the day will be approximately the same whether he has taken the route of using a land promoter or entering into an option agreement.
This distinction is particularly important when you consider working with us because, whilst we actively seek business as a land promoter, we also have residential construction division in Luvli Homes.
We have mentioned briefly above the proposition that the only point where a land owner’s interest and the promoters interest diverge is on sale of the property once planning permission has been achieved. On another page we explain in detail how the selling proposals are managed in our agreement. We love to be absolutely transparent in all our dealings, whether we are buying land or selling houses.
A word on overage agreements
Many solicitors, surveyors and auctioneers see an overage agreement is a very simple way for a land owner to maximise the ultimate return achieved by a buyer as a result of a grant of planning permission. If you approach an auctioneer, of course they will want you to sign up to their next auction, so they’re unlikely to want to discuss promotion or option agreements.
To set up an overage agreement is comparatively straightforward and gives the auctioneer the nice comfortable feeling of having done her/his best for the client. Actually, that is an unlikely outcome. However, if you really do not have time to wait for the outcome of an option or land promotion agreement, maybe two years away, it must be said that an overage is a simple way for you to obtain the current value of the land through a sale, presumably by auction, and just hope that the buyer has a great bonus for you in due course.
If you do choose an overage agreement, it needs careful consideration. Obtaining planning permission is not simply a walk in the park. Here’s a full analysis of how to set up an efficient overage deal if you really must take that route.
We might like to buy your land
If your land suits our construction programme, then we may well be prospective buyers under a promotion agreement or we may simply tell you that our only interest in your land is to buy an option. Whatever we say will be open and transparent. However, there is an obvious and powerful advantage in our offering as a buyer to conclude a promotion agreement. That is, that we have lived with every possible characteristic of your land for many months. If we therefore decide to bid for it, we shall do so with certainty and without needing to tag you along for another six months well we make up our mind or consult third parties.
That might happen only within the framework which we have described on the page dealing with how selling out works. As a result, there is never any chance that our offer will not be the best offer. Our involvement will only ever give you the best price.
We understand that you might still be sceptical. If so, please don’t hesitate to ask us to have a look at your land. This is a free service – absolutely no obligation.
If we work with you from the outset on an option agreement then selling out is simply a conveyancing transaction. With a promotion agreement, on the other hand, we have to persuade you and your professional advisers that we have the best chance of obtaining the best price for you. The most common difficulty we have with that proposition is that everyone has professional friends. Surveyors in particular will have built up personal relationships which will strongly influence their objective judgement. If you decide to work with us, then you may have to instruct your surveyor/valuer firmly.
Giving you a deal that you are ultimately happy with is our number one priority. Happy partners help us to grow. Here is more about how we do this.
Of course, once that surveyor has seen the amazing houses built by Luvli Homes, he/she is likely to be another fan for life!
If you would like a useful summary of our services, here it is.