When selling land with development potential (i.e. land which doesn’t yet benefit from planning permission authorising development) there are various legal agreements which can be used to hopefully achieve a sale. Here we take a very brief look at the three most common types of agreements and what they each offer to a seller or landowner.
Types of agreements for selling development land
Conditional Contract
In a conditional contract scenario, if the contract condition (i.e. the grant of satisfactory planning permission) is satisfied (or, if applicable, waived by the buyer) within the relevant timeframe allowed for under the contract, the buyer becomes bound to complete the purchase of the site.
A conditional contract can be more advantageous to a seller than an option (see below) because it affords the seller greater certainty that a sale will be achieved if the contract condition is satisfied (or waived).
Further, most (but not all) conditional contracts provide for a fixed sale price so the seller will know at the point of exchange how much money they will receive on completion.
In order for a conditional contract to afford that greater level of certainty to a seller, it is essential that the contract imposes appropriate, unambiguous and timely obligations on the buyer so that the buyer is obliged to try and satisfy the contract conditionality which will trigger the obligation to buy.
There is often negotiation as to what will constitute a planning permission sufficient to satisfy the contract conditionality (usually referred to as a Satisfactory Planning Permission). The contract should make it clear as to whether this is to be an outline (with or without reserved matters) or detailed planning permission. From the seller’s perspective it is critical that the acceptability or otherwise of any planning permission is measured against objective criteria as any element of subjectivity for the buyer will dilute the seller’s certainty and control.
Call Option Agreement
When a seller grants a call option to a developer, the agreement may afford the developer absolute discretion to decide whether a planning permission is a Satisfactory Planning Permission. Even if the agreement doesn’t afford the developer this degree of control and the acceptability or otherwise of any planning permission is measured against objective criteria, the developer can always choose whether or not to exercise the option and buy the site following the grant of Satisfactory Planning Permission. While the option will impose obligations on the developer to try to obtain Satisfactory Planning Permission, the developer will never be under an obligation to actually exercise the option.
Therefore, in a call option scenario the seller has less certainty that a sale will be achieved. As compensation for this lack of certainty a seller will often be able to command a deductible but non-refundable financial premium which is paid by the developer on entry into the call option agreement.
It is helpful from the seller’s perspective if the option agreement allows for a period of time following agreement or determination of the price (post Satisfactory Planning Permission) in which the developer can exercise the option or it otherwise falls away – a “use it or lose it” provision. Such a provision affords the seller a degree of control in that it can force the issue: the developer has to exercise the option or the seller can elect to terminate the option and remarket the property. In this scenario, in order to preserve the value in the property attributable to the planning permission, there should be an obligation on the developer to allow and/or procure third party reliance on the planning permission drawings and underlying technical due diligence.
Most call options are not fixed price but instead provide for a purchase price calculation mechanism which requires the then current market value of the site to be agreed or determined. The price payable by the developer will be a % of that market value. The price calculation mechanism also allows the developer to deduct its external costs incurred to date in achieving the Satisfactory Planning Permission (subject to any applicable cost caps).
Therefore, a seller will not know at the point of entry into the call option agreement how much money it will receive if Satisfactory Panning Permission is achieved and the developer exercises the option and acquires the site. For this reason, it is critical from a seller’s perspective that the option provides for a minimum purchase price (being a net receipt in the seller’s hands) below which the seller is not obliged to sell the site. Also, given that options can last for several years that minimum purchase price should be index linked so that its value is not eroded by the passage of time.
Promotion Agreement
A promotion agreement enables a landowner to have access to the promoter’s experience, expertise and financial resources to obtain planning permission for development on the landowner’s property. The planning permission significantly increases the value of the property which can then be sold on the open market for a significant uplift.
Under a land promotion agreement, a promoter typically agrees with the landowner to:
- Apply for planning permission for development on the landowner's property; and
- Market the property for sale on the open market once planning permission has been obtained.
On entry into the promotion agreement there is no guarantee that the promotion will be successful and that planning permission will be obtained and the site sold. However, the promoter manages the whole planning promotion process and accepts all of the financial risk by funding the landowner’s relevant professional costs as well as the planning and marketing costs. Because there is no guarantee that those costs will be recouped as the promoter only gets paid if the property is successfully sold, the promoter is naturally motivated to succeed. In addition, the promoter may pay a financial premium in order to enter into the agreement.
If planning permission is not obtained by a certain date, the agreement terminates and neither the premium nor any costs incurred by the promoter are reimbursed.
If planning permission is obtained and the property is sold then the promoter receives from the sale proceeds:
- Reimbursement of both the premium paid on exchange and also the promoter's costs incurred (subject to any applicable costs caps); and
- A promotion fee being an agreed % of the net sale proceeds.
The landowner receives the balance of the net sale proceeds.
As with a call option, the landowner will not know at the point of entry into the promotion agreement how much money it will receive if the promotion is successful and the site is sold. The price achieved will depend on the terms of the planning permission obtained and the state of the market when the consented site is marketed for sale. Therefore, from a landowner’s perspective the promotion agreement should contain, amongst many other things, the minimum price provisions discussed above.
An advantage of a promotion agreement (and a call option agreement) for a landowner is that the landowner doesn’t have to make any financial contribution to the planning promotion process and until planning permission is obtained and the property sold the landowner retains ownership of and is able to continue to use the property. Also, in a promotion scenario (unlike an option) the price payable for the consented site is market tested and the parties will hopefully be able to choose from several rival bids.
The promoter isn’t exposed to development risks: it doesn’t have to pay the purchase price or development costs or run the risk that the completed development is worth less than the aggregate of all costs incurred to date.
Generally speaking, in a promotion agreement, the landowner and promoter interests are aligned: it is in both parties’ best interest to secure the most valuable planning permission and the highest possible sale price. For both the landowner and the promoter the purpose of a promotion agreement is to share in the financial uplift achieved on planning which is realised when the consented land is sold.
How we can help you
Wright Hassall has extensive experience in each of the above legal structures (conditional contracts, call options, and promotion agreements) acting for landowners, developers and promoters. Please contact Claire Waring.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
