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Promotion Agreements – A new method to developing strategic land
For more information about entering into Promotion Agreements, contact JMW's Julian Rogozinski on 0161 828 8357.
As a developer, you will appreciate that realising value from a site with potential for development is not without risk. There are hazards at every stage of the land promotion; determining whether title to the land is satisfactory, the fear of the landowner withdrawing from the project and the significance of unforeseen costs that arise during the ever changing planning process.
Option Agreements have been the traditional (and most popular) method for a developer to promote land for development to maximize its value and minimize some of the risks. The Option Agreement provides prospective developers with a right to buy strategic land for a predetermined amount within a specified time; usually once the developer has obtained the relevant planning permission for development of the site.
A different agreement – a Promotion Agreement – has however being gaining popular momentum as an alternative to the traditional Option Agreement. Set out below are some reasons why this new agreement may be the better ‘option’ for you.
The Promotion Agreement
Under a Promotion Agreement, the developer (‘promoter’) agrees to promote the land through the planning process, to secure planning permission for development. Provided planning permission is granted, the promoter agrees to market the land to secure buyers. The landowner, in return, then agrees to sell the ‘promoted’ land to the successful buyer if the development is a success, and the net sale proceeds are shared between the promoter and the landowner. The parties will agree in advance the proportion of their share, which shall be reflective of the level of risk each has undertaken.
The costs of promoting the land will be borne by the promoter and then recovered from the net sales, provided the project is a success.
1. Cost: By promoting the site in this way to achieve net sales, you avoid incurring the cost of having to actually acquire the site yourself, but share in the uplift of value. When the land value is maximised, it is then sold to third party buyers through the marketing strategy in place. In the current economic climate, the costs of acquiring the site would have been a deciding factor resulting in a developer walking away from a project. This is avoided here.
2. Value: The value of the Property under a Promotion Agreement will be its actual value (as there is an actual sale to a 3rd party at market value), not a hypothetical market value. As such, you would not be relying on a hypothetical valuation of the property, as you otherwise would under an Option Agreement. Further, the property will not be sold at a discount, which can often be the case under an Option Agreement. Rather, it will be sold at its full market value.
3. A common interest: Due to the structure of a typical Option Agreement, a conflict of interest between a developer and landowner will arise at the point where the option is exercised as the landowner will inevitably be seeking the highest value for its property, whereas the developer will be seeking to acquire it for its lowest value, understandably. A Promotion Agreement avoids this conflict as it is in both parties’ interest to seek the highest value for the land possible and, naturally, this will formulate a more positive working relationship between the parties.
Of course, a Promotion Agreement does not free you of the risks alluded to above. However, there are mechanisms for protecting you against these risks, and our Commercial Property team at JMW is vastly experienced in acting for promoters entering into such agreements and protecting against the risks and pitfalls that may arise.
Get in touch
Should you be in a position whereby you are faced with the prospect of entering into a Promotion Agreement, please feel free to contact Julian Rogozinski at JMW on 0161 828 8357 for further information.