Farmers Club Magazine
Option or promotion agreement – how best to achieve planning consent and maximise value
Local authorities are under significant pressure to deliver new housing and many of them are still unable to show a five year supply of land for housing as they are required to do by the National Planning Policy Framework. This gives landowners the opportunity to consider whether some of their land might be suitable for development. However, the promotion of land for development is dependent upon getting the timing right, requires specialist expertise and involves very considerable expenditure, normally completely at risk should planning consent not be forthcoming.
For many landowners, the cost/risk ratio is unacceptable and therefore they look to work with experts, who will take the risk and cover the cost of a planning application, in return for a share of the proceeds of the sale of the land should planning consent be granted. Historically, this has often been done by entering into an option agreement with a housebuilder, but more recently, a new breed of land promoter has appeared, working with landowners using a promotion agreement rather than an option agreement. The fundamental difference between the two is that, under an option agreement, the housebuilder promotes the land for development, at its cost, and then has the right to BUY the land should planning consent be granted. A promoter will promote the land for development, at its cost exactly as a housebuilder will do, but then has the right to SELL the land, with the landowner, once planning consent is granted.
The significance of this is that, until planning consent is achieved, the interest of all parties is aligned. However, under an option agreement, as soon as planning consent is granted, the housebuilder wishes to buy the land as cheaply as possible whereas, under a promotion agreement, both the landowner and the promoter wish to sell the land for as much as possible and therefore their interests are completely aligned throughout the process.
In practical terms this means that a housebuilder will seek to maximise the ‘abnormal’ costs of development (foundations, ground conditions etc.) to minimise land value. Assessment of the purchase price, carried out by looking at the value of other sites that have been sold, is a retrospective and notional process. The true value of the land is not tested, often leading to a lower ‘agreed value’ than would be achieved if the land were to be sold on the open market. However, housebuilders may look for a lower share of the proceeds and there are instances where having the end deliverer of the housing can have some benefits in planning terms.
Whilst the prospects for bringing land forward for development have rarely been so favourable, landowners need to consider very carefully with whom they work, and on what basis, not only to give themselves the best chance of a successful planning application, but particularly to ensure that they receive best value for their land should planning consent be granted.
Chris Haworth BSc FRICS ARPS