Promoting development opportunities

Do you know the Pet Shop Boys’ song “Opportunities”? A slightly tweaked version could be a jingle for this article, beginning as it does; “I’ve got the brains, you’ve got the looks, let’s make lots of money”. Swap “brains” for “land”, and “looks” for “skills” and you have a musical summary of a promotion agreement. If one were on the hunt for such a thing.

Promotion agreements are one option that can be used where a landowner has land suitable for development but lacks the time or expertise (or inclination) to carry out the development themselves. Their advantage over other options (such as, for example, a sale to a developer conditional on planning) is that the landowner can realise a higher price for the land, because it is sold with the benefit of planning permission.

How it works

Promotion agreements work by providing that the promoter will undertake and pay for preparatory planning work to obtain a planning permission for development, while the landowner retains ownership and control of the land. After planning has been secured, the land is marketed and sold with the benefit of the planning permission. The agreement between the landowner and promoter will set out parameters for how marketing, acceptance of an offer and sale are to be dealt with and will usually specify how sale proceeds will be split between them on completion. The promoter’s share typically varies from five to 20 per cent, with the landowner retaining the balance.

By entering into the promotion agreement, the parties commit to the process of applying for planning and then promoting the land for sale for a given time. If a satisfactory planning permission is secured which meets the criteria set out in the agreement and a buyer is found, both within the agreed period of time, the landowner is then obliged to sell in line with the agreed terms. If not, or if the agreed marketing and sale process do not produce a sale that meets the sale agreed criteria, such as any set minimum price, the promotion fails and the agreement ends on its contractual termination date.

Promotion agreements can be advantageous to both parties, incentivising the promoter to use their skill and experience to maximise the sale price (and therefore, their share of it and not to lose the money they have spent on the upfront costs of applying for planning) whilst allowing the landowner to continue using the land during the process and to benefit from an overall higher sale price eventually. There are, however, some common areas of tension that should be given careful thought at the heads of terms stage.

Negotiation points

• Although both sides will want to achieve a sale at a good price, a landowner might be more inclined to wait to try and get the best sale value for their one chance to sell their asset, whereas the nature of the promoter’s ongoing commercial operation might mean they would prefer to prioritise securing a sale sooner rather than later, recouping their investment and moving on to the next project. There are also variables beyond the parties’ control, which will affect the value of the site over time: the housing market as a whole, associated building costs, the conditions of the planning permission granted and so on. These can make it difficult to know when to sell and what offer to accept. In some cases, the landowner is able to negotiate greater control over the sale process, perhaps with only a requirement to consult with the promoter on offers, on the basis that the lion’s share of the proceeds (after deduction of planning costs) will belong to the landowner.
• How much control does the landowner want over the planning application? Retaining an element of control over the design and appearance of the development is important to some estates. This is particularly the case where there are pastoral or legacy considerations on the part of the landowner, or perhaps where they will retain neighbouring land that may come forward for future development. Although promoters may view this as a cumbersome fetter, given the increased value placed on ESG credentials, high quality design and placemaking, such attention to detail may in fact be to the advantage of both parties. With other estates, the focus may be more on maximising financial returns and approving the planning application with that in mind.
• If the landowner wishes to retain built units to add to its own rental stock, a no sale provision and formula will need to be included, so that the promoter is compensated according to what they would have been paid if there had been a sale.
• The promotion agreement usually sets out that after a period of appropriate marketing in line with the marketing strategy, the best financial offer will be accepted. A minimum price or minimum return (the latter allowing for the deduction of any agreed costs) can sometimes be agreed. This can be a prudent provision to include, to ensure the landowner has some security against a downturn in the market: including a minimum price means they will not be forced to sell at a price which is unacceptable to them.
• The agreement will set out which costs are to be reimbursed out of the sale money before the net proceeds are divided. The promoter will want a wide description of deductible costs to recover as much as possible, given that they have paid the upfront costs of applying for planning. The landowner will want to set some boundaries over what those costs might end up being. A suitable compromise on deductions can be agreement that deductible costs are only permitted up to a set limit, and this type of cap is a good idea for any landowner to try and include. Landowners should also generally seek to exclude the promoter’s “internal” costs, so that only money actually paid out to third parties can be deducted.
• The landowner will be keen for the planning permission to be in the most advantageous form possible. Along with the buildings / sale plots, there are other components, ancillary to development such as; infrastructure (for example waste treatment systems), roads, communal areas such as bin stores and landscaping or biodiversity areas. Biodiversity Net Gain is another recent aspect that is going to be relevant as a requirement on most sites from this year. Elements like these are necessary to allow the plots to be built and sold, but the more space they take up, the fewer sale plots can be created. Part of the promoter’s planning obligations will often therefore be to maximise the high value development areas and minimise the ancillary areas.
  
  

“I’m looking for a partner…” Neil Tennant sings. And it is worth bearing in mind a promotion agreement is a relationship that lasts for many years, so landowners need to choose wisely (and check the assignment provisions!).

This article is part of the Rural Estates Newsletter 2024, click here to read.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024