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Residential development land: Which is best – an Option Agreement or Promotion Agreement?

When considering development opportunities for residential land, landowners are often presented with two primary means of taking development forwards. Either through an Option Agreement with the developer, or a Promotion Agreement.
January 29, 2025
When considering development opportunities for residential land, landowners are often presented with two primary means of taking development forwards. Either through an Option Agreement with the developer, or a Promotion Agreement.

Each has distinct advantages and potential pitfalls which can significantly impact a landowner’s returns and level of control.

In this article, Gary Jeffries, Head of Residential Property, explains the key differences between Option Agreements and Promotion Agreements, which could prove to be crucial in unlocking full land value potential.

Option Agreements

An Option Agreement grants a developer the right (but not the obligation) to purchase the land within a specified time frame.

Typically, this is at a pre-agreed price or one determined by a percentage market value at the time of exercise and the developer usually pays a nominal upfront fee for this exclusivity.

Advantages
  1. Certainty of buyer: The developer commits resources to securing planning permission and, upon success, exercises the option to purchase.
  2. Reduced landowner risk: The planning costs and risks are borne by the developer.
Potential issues for landowners
  1. Price sensitivity: If the land value increases significantly, the agreed mechanism for valuation may not reflect this, potentially leading to undervaluation. Also, the price is fixed by a valuation methodology, so there is no competitive bidding which may mean the highest return is not always achieved.
  2. Limited control: The developer drives the process, potentially prioritising their profit margins over maximising the landowner’s return.
  3. Expiry risks: If the developer doesn’t exercise the option, the landowner may need to start the planning and marketing process anew.

Promotion Agreements

A Promotion Agreement involves a promoter working collaboratively with the landowner to secure planning permission and sell the land on the open market.

Proceeds are then split based on pre-agreed terms after costs are deducted.

Advantages
  1. Market exposure: The land is sold competitively, potentially yielding a higher price.
  2. Aligned interests: Promoters and landowners share the goal of maximising land value.
  3. Transparency: Landowners retain more involvement in key decisions, particularly regarding timing and sale strategy.
Potential issues for landowners
  1. Shared risk: Unlike Option Agreements, landowners could choose to share upfront planning costs, which could be substantial, but most promoters will agree to take all the planning risk.
  2. Dependency on promoter performance: In this situation, the landowner relies heavily on the promoter’s expertise and diligence.
  3. Disputes over sale timing or offers: There is the potential for misalignment on the “right” sale price or timing can lead to conflicts.

Dispute resolution considerations

Disputes under either agreement often arise and tend to be over valuation, planning strategy, or sale proceeds. However, there are several ways to avoid a dispute, including by:

  • Including clear dispute resolution mechanisms, such as arbitration or expert determination, in the contract.
  • Setting transparent and independent valuation processes to avoid disagreements over land value.
  • Ensuring strong communication between all parties throughout the process.

Which agreement is best for landowners?

Ultimately, the choice depends on the priorities of the landowners in question.

Those seeking certainty and minimal risk may prefer an Option Agreement, meanwhile those aiming to maximise value might find Promotion Agreements more attractive.

Either way, both types of agreement will require robust legal and valuation advice to avoid potential pitfalls and disputes.

If you own land with development potential, understanding these agreements is crucial to unlocking its full value.

Vail Williams specialises in guiding landowners through these complex arrangements, to ensure the best outcomes with the minimal amount of risk. Get in touch with our team of residential development consultants for more information.