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Option agreements are a legal contract between a landowner and potential buyer of a site which is usually a housebuilder or developer. The developer has the option to buy the land at an agreed price within a fixed timeframe, once the terms within the option have been met (i.e. planning permission has been granted).
In many cases, the developer will pay, on entering into contract, an ‘option fee’ for the right to exercise the option agreement. The developer will also apply for planning permission, meaning that the landowner doesn’t have to do this at their own cost or risk. Entering into an option agreement does not guarantee a sale at the end of the fixed timeframe though – so there is a risk for the landowner as they cannot sell to any other interested parties in this timeframe. One of the other key benefits of an option with a housebuilder is to demonstrate deliverability – an important consideration for a local authority when determining which sites come forward.
Yes, an option agreement is a legally binding contract. Both landowner and developer will be bound by a set of legal obligations, and these are there to project both the landowner and the developer. Sometimes people confuse option agreements with pre-emptive agreements, which only gives a prospective buyer first refusal, essentially the privilege of deciding whether to accept or reject it before it is offered to others.
A promotion agreement is normally entered into by a developer for larger residential or commercial developments. The developer or promoter, is responsible for obtaining planning permission and paying for all associated costs. The land is then marketed for sale once planning permission has been granted. Once a buyer is secured, the landowner is then obliged to sell and the developer will receive a fee (normally a percentage of the net sale proceeds) after deduction of the promotion costs. There are other ‘hybrid’ mechanisms which combine an option and a promotion agreement which are more common for larger sites.
A promotion agreement is essentially a partnership between the promoter and landowner whereby the promoter takes on the costs associated with obtaining planning permission and they have the expertise, skills and resources to achieve this. The landowner also has the benefit of the land being tested by the market rather than being tied to a fixed price; as the promoter takes a percentage of the land sale price, they are incentivised to achieve the best price for the landowner.
Typically anything from 3-10 years – sometime longer for larger strategic sites. It is therefore important to understand every detail and in particular what obligations there are on you as the landowner. Shorter contractual timeframes don’t always guarantee quicker or more positive outcomes and can do the opposite – planning is often a long game with the timeframes largely dictated by the planning system. In many cases, giving a developer sufficient time to succeed provides them with confidence to invest, thereby increasingly the likelihood of a successful outcome.
Is there anything to be cautious of when negotiating an option or promotion agreement?
Aside from deciding which contract mechanism and which developer to work with, there are several things to consider, including:
– Are the timeframes reasonable, practical and realistic?
– How is the purchase price calculated?
– What happens to surplus or non-developable land?
– Will there be any potential unforeseen taxes, charges or deductibles?
– What are the conditions if the landowner (or other parties) want to walk away or dispose of the land?
– What obligations are there on you as landowner?
– Who pays for legal and professional advice and how is this secured?
– Under what circumstances can the timeframes be extended?
Our land experts can help guide you through the process and ensure you're getting the best deal for your land. For an informal discussion, please give them a call on 01344 753230.
Both mechanisms have advantages and disadvantages and much will depend on the sites planning credentials, the planning status, the developer, the commercial terms as well as the landowner’s individual circumstances. We are not wedded to any particular land disposal structure though we will always provide objective advice to landowners based on our experience. Our approach is to listen to the landowner, understand their objectives and offer professional advice as though the land was our own. We help landowners avoid common pitfalls, negotiate the best terms for them and support the landowner throughout the process all the way through until completion.
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Our team of land experts have collectively over 150 years’ industry experience and benefit from an extensive network of contacts at the most senior levels within the development industry that we can utilise to your advantage. We provide professional impartial advice to landowners across the UK on sites ranging from small developments of several houses to new settlements comprising upwards of 3,000 homes. If you want to know whether you’re getting the best deal for your land, or if you want someone to work on your behalf directly with developers, we can help.
Get in touch on 01344 753230 for an informal chat in confidence.