LAND JOURNAL

Promotion agreements increase plot sales

For landowners looking to maximise the value of land for sale, promotion agreements are becoming a more attractive choice

Author: Caroline Irvine

15 April 2020

Landowners thinking about selling a plot may consider obtaining planning permission on it, which usually increases the value to any prospective purchaser. A promotion agreement can be advantageous in this potentially risky process.
"Ultimately, the aim of a promotion agreement is to maximise the landowner's chance of receiving the best possible offer for thier land"

In the context of property transactions, a promotion agreement is most commonly used when there is medium- or long-term planning potential for the land. These types of agreement between a landowner and a promoter  usually a developer  involve the owner putting forward land for development, with the promoter under an obligation to present it in the best possible light to obtain planning permission.

Once permission is granted, the promoter will direct the landowner to market the property to a developer and take their cut  of the sale price. Where the promoter is also a developer, costs can be saved because the same organisation is looking to market and secure planning permission.

Either way the costs, and consequently the risk, of promoting the land lie with the promoter in the first instance, but are then repaid when the land is subsequently sold. 

This way of working can give landowners more security as their best interests are firmly aligned with the promoter's; both aim to get the best possible price for the land. Often lasting many years, promotion agreements are generally used for larger, more strategic development sites but they can be applied to a range of land packets.

Be prepared

Confidence in the saleability of the plot is key since landowners may not reap the benefits for several years after the exchange of the agreement. Before entering into such agreements, it is crucial to prepare for all eventualities to prevent getting caught out further down the line.

With land being such a rare commodity, every landowner's worst fear is being stuck in an agreement that turns their asset into a burden. When negotiating the terms of a promotion agreement, all parties should agree a long-stop date  that is, the point when the agreement comes to an end. This timescale should take into consideration time for any planning appeals that may arise. It is important to remember that while a promotion agreement is in place, a landowner's ability to sell or mortgage it can be limited  something that must be a central consideration when deciding on a long-stop date. Timescales vary, but agreements often last around three years.

For landowners who want to mortgage their land, having a clear understanding of the types of restriction associated with the promotion agreement can help boost their position before making a commitment, and it is therefore essential to check the way the agreement is drafted. Some banks will not lend on land where a promotion agreement is in place, so it is advisable to raise these concerns with the bank before entering  into any promotion agreement.

An agreement can also affect the planning process and, by its very nature, the level of involvement that the landowner has throughout it. Establishing your expectations at the start can result in more transparency. If you are keen to be involved in all stages of the process including overseeing all correspondence, whether from the local authority or anyone who has commented on the application  it is important to make this clear to the promoter at the outset. As with all agreements, communication is the key.

Ultimately, the aim of a promotion agreement is to maximise the landowner's chance of receiving the best possible offer for their land. Sometimes, they will only find out how successful they have been at the final stage; for example, planning permissions may only be granted for two houses instead of the ten for which the landowner might have applied.

However, if there is an agreement in place then this must be honoured, and the promoter gets a cut regardless. Avoiding this shortfall is simple, though  by  suggesting to the promoter the exact type of planning permission they have in mind for the sale of the land, landowners have more control.

To help guarantee that they get the offer they want, landowners can set a minimum price in the promotion agreement, and they do not have to settle for less.

As with any legal, work they should be wary of the small print and keep an eye out for any clauses in the agreement that require landowners to sell their land if the minimum price is achieved. This is important as it can be detrimental to  any forecast profit margins.

Right of appeal

Among other things, landowners should consider the possibility that their planning application may be refused. If this happens, and if they want the promoter to appeal on their behalf, that can be set out in the promotion agreement. It is important to note that only the person who made the application can appeal a planning decision; other parties are simply permitted to comment on an appeal.

To maximise the chance of success, applicants should respond to planning decisions as soon as possible. The deadline to appeal is within six months of the date on the decision notice from the local planning authority, so it's critical to have regular communication with the promoter.

Alternatively, there is a possibility that a developer may submit a further application and get planning for more houses. This will increase the value of the land before it has been developed, resulting in a larger overall profit for the developer once all the houses have been bought and sold. If this happens then the landowner may consider entering into a new overall agreement, which would entitle them to a proportion of the developer's additional profit. 

In a legal context, overage refers to an amount exceeding a certain sum or quantity, and such an agreement is commonly dubbed an anti-embarrassment provision; it could include, for example, securing the rights to any uplift in future value of property or land.

In most cases, the provisions allow a seller to share in the increase in land values resulting from obtaining planning permission or from a use of the property and land different to the one at the time of the original sale. It is important to understand that overage clauses don't apply to any increase in property prices resulting from unpredicted market forces.

For landowners looking to sell off part of their portfolio, an overage agreement may have a significant role in the success of a future sale. In the complex world of property disposals, all parties involved must consider the importance of clauses that safeguard the seller's right to their share in the future value of the land or property, and an overage agreement can enable that.

Since most property arrangements could involve an element of overage, it should be agreed and annexed to the promotion agreement before it is finalised. For an overage payment to be made, a trigger event must occur first  such as the grant of planning permission or sale of the land with the benefit of a new planning permission  by the developer.

With clear understanding from both parties, promotion agreements can be  a satisfactory way to provide developers and landowners with security and maximise financial opportunities regardless of what the future holds.

Caroline Irvine is a commercial property partner at Shakespeare Martineau caroline.irvine@shma.co.uk

Related competencies include: Planning and development management

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