The Paperwork

Option Agreement

An option agreement is a form of contract used for the sale of land. An option will not complete for months and in many cases years, assuming of course the option is exercised and the contract is completed at all. The option agreement gives the holder a unilateral right to acquire the land which is the subject matter of the agreement subject to the conditions named being satisfied.

 

Promotion Agreement

A promotion agreement, (sometimes referred to as land promotion agreement or development promotion agreement) is a form of contract that mimics the appearance of an option agreement and may well include options for the promoter to acquire the land. The parties to a promotion agreement are usually the land owner and the ‘promoter’, who could be a developer.

 

Contrasting Option Agreements & Promotion Agreement

Under a promotion agreement the promoter uses their expertise and often money to promote the land or property for development to the local planning authority, then applies for and secures planning permission. The planning permission would usually be for the form of development project agreed with the land owner – naturally this has to be viable and suitable for both parties. The promoter then promotes the property (with the benefit of planning permission) in the open market for sale.

Promotion agreements are beneficial since it effectively places both the land owner and the developer promoter on the same side of the table since they are both working together to achieve a common purpose. Both land owner and developer promoter would share in the benefit of enhanced values of the development site and thus both parties have an interest to maximise those values.

The relationship between the parties in a promotion agreement can thus be contrasted with an option agreement which can be exercised after the grant of planning permission. Under most commonly drafted option agreements, the land is valued at the stage when the option agreement is entered into, i.e. before the enhanced value added by securing planning permission. The developer could thus sit and wait until the economic climate suits the developer to apply for planning permission then subsequently exercise the option.

Overage provisions are included in option agreements to deal with the enhanced value arising out of the initial and any subsequent permissions.

In contrast with an option Agreement the land owner and developer sit on opposite sides of the negotiating table and so may disagree on many terms, including purchase price and level of any overage trigger. This adversarial approach makes agreement of a deal difficult and often derails the deal completely. The promotion agreement, with both land owner and developer working on the same side for a common purpose is often easier to negotiate and agree.

 

Minimising Developer Contribution

Under a promotion agreement, both parties are motivated to ensure any contributions are kept to a minimum. Neither party would want to concede too much to the local planning authority to secure planning permission.

Under an option agreement, if the terms of a Section 106 agreement contribution are too demanding in the eyes of the developer, the developer would not exercise the option leaving the landowner with an nonviable site and not of any interest to other developers.

In a conditional purchase contract, the developer would try to classify the planning contribution agreement as an ‘onerous condition’ and get out of completing the purchase contract, since the contract never becomes unconditional.