‘Inexperienced landowners may not realise that a promotion agreement creates what could be a long-term relationship with the developer,’ warns Douglas Godwin,Partner and Head of Rural Services and Commercial Property with QualitySolicitors Parkinson Wright. ‘The developer will be taking on much of the financial risk, so will want to maximise returns and it is crucial that the landowner has good legal advice to make sure they get the best deal possible.’
There will be a lot at stake, so it is important to get an experienced lawyer to make sure that the promotion agreement is well drafted and covers all the relevant issues.
Douglas Godwin summarises how a promotion agreement works and the pitfalls which you need to look out for.
How a promotion agreement works
The landowner and the developer will generally have a specific development project in mind when they enter into the agreement. Once the agreement is in place, the developer must try to obtain planning permission for the agreed development. The developer will bear all the costs of working up the planning application and getting it through the various stages of the planning process. This is a risk because there is no guarantee that permission will be granted. If the planning application is successful, the landowner is then required to sell the site on the open market, with the profit shared between landowner and developer.
The promotion agreement will set out what the developer must do and should include the following obligations:
- The developer must produce a planning strategy and follow it through to maximise the chances of planning permission being granted. If it is impossible to get the intended planning permission the risk of any wasted costs should sit with the developer.
- The developer will be required to appoint a range of professionals to draw up the development scheme before the planning application goes in. As well as a designer, this might include structural and mechanical engineers and environmental consultants.
- Once planning has been achieved, the developer will be required to produce a disposal strategy, designed to maximise the return for both developer and landowner.
Issues to watch out for
Your solicitor will be looking at various aspects of the promotion agreement to ensure that your interests are protected, while still allowing the developer enough financial incentives to make the deal attractive.
- Time frame - The obligations in the promotion agreement should have a clear lifespan. These are not short-term arrangements, but you and the developer may want the right to walk away if planning permission has not been achieved after an agreed period. This must be long enough to allow a realistic period for the developer to work up the scheme and get it through the planning process. How long this takes will depend on the site and local planning policies, but a developer will usually want at least five years and sometimes up to ten years.
- Competition - It may seem obvious, but it is important that the agreement has a clear obligation on the developer not to promote a competing development while the promotion agreement is in force. Your solicitor will try to define ‘competing development’ as broadly as possible, so that it covers any other development that would make it more difficult for your project to achieve planning permission and a successful market sale. In practice, this can be tricky to negotiate, because a professional developer may not want to be restricted to one project in an area. The advantage of a promotion agreement is that both sides have an interest in the development being successful, so it should be possible to compromise on, say, a specific geographical area or a specific type of development.
- Reasonable endeavours - In any agreement where one party is expected to try to achieve a specific outcome, there is scope for arguments about how hard they must try. The starting point is usually that the developer must use all reasonable endeavours to achieve the expected planning permission. That means that the developer would have to do everything a prudent person acting in their own commercial interests would do, but there is no fixed rule about what that actually involves. To protect your interests, your solicitor will look for ways to set out specific steps that the developer must take and an agreed timetable for doing it. For example, it is better to agree in advance whether the developer must appeal if planning is refused, because that is not always covered by ‘reasonable endeavours.’
- Landowner involvement - You should consider with your solicitor how much control and involvement you want to have in ongoing decisions. For example, as the planning application progresses, it may be necessary to make changes to deal with issues raised by the planning authority. This might include proposed changes to the design and layout of the finished development. The developer may want a free hand because this will make decisions easier and quicker, but if you have strong views or feel you may come under pressure from long-term neighbours and want to be closely involved, your solicitor will try to negotiate suitable provisions in the agreement. You should be realistic though and accept that the developer and professional team will not want to seek your consent for every detail.
- Disposal strategy - The developer’s disposal strategy will cover issues like whether the site will be sold as a whole or in parts, the timetable for disposals and how it will be marketed. Again, both sides have an interest in selling the site quickly and achieving the best profit possible, but you should have the right to approve the strategy or request changes.
- Termination - In case things do not go to plan, your solicitor will need to agree terms which provide rights for you to terminate the agreement if the developer breaches their obligations or goes into any type of insolvency. As well as ending the arrangement, you will need the right to take control of the project, so the developer should be required to transfer all professional appointments to you and hand over all relevant paperwork.
- Profit share - Perhaps the most important issue is the eventual profit. The usual split is 80% to the landowner and 20% to the developer but this can vary. If it looks as though planning permission may be tricky to achieve, the developer is taking more of a risk and may seek to negotiate a larger share of profit if they succeed. The developer will want to deduct as many costs as possible from the sale proceeds before the remaining profit is split. The agreed list of costs will be set out in the agreement and your solicitor will look very carefully at them to make sure both parties are being treated fairly.
How we can help
If you want to get the best value from your land, our lawyers will look out for the potential issues and make sure you get the best deal, especially where you are dealing with a much more experienced developer.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.