Option agreements and promotion agreements have become increasingly popular both with landowners and property developers – so what are they, when can they be used, and what differentiates one type of agreement from the other?
Option and promotion agreements are ways of extracting capital from land with development potential. Both types of agreement give entitlement to an interest in the land – either to the developer by way of an option, or to a third party engaged to promote the sale of the land. However, the two types of agreement differ significantly.
Under an option agreement, a landowner grants a developer the right to purchase the property for a set price within a defined period. This type of agreement is often dependent on the developer meeting certain criteria such as successfully obtaining planning permission. If the developer has a change of heart or is unable to fulfil the imposed conditions the option may expire and, as a consequence, the land remains unsold. Under an option agreement, the interests of landowner and developer are sometimes perceived to be at odds with each other – while the landowner wants to achieve the highest possible price for the land, a successful developer will want to buy the land at the lowest possible price.
Under a promotion agreement, a land promoter agrees to work as the land owner’s agent. For example, the promoter may apply for planning permission, create a marketing pack, promote the land for development on the open market, negotiate prices, terms and conditions, and deal with offers. In return, the promoter receives a fee, sometimes expressed as a proportion of the net sale proceeds – under a promotion agreement it is beneficial for the landowner and developer to work together in order to realise the best possible price for the land.
So, when should you use one or other of these two significantly different options? Your decision is likely to hinge on the specifics of each case, alongside factors such as the developer or promoter’s ability to develop the land. Issues around the landowner relinquishing control of the land also come into play, and it is important at the outset the agreement you choose is drafted with care to ensure it accurately reflects all parties’ intentions and is appropriate for your situation.
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