Advice for landowners – the advantages and traps of promotion agreements

What are the benefits of land promotion agreements and when should landowners be wary? One of our experienced agriculture & estates lawyers shares their insight.

Promotion agreements are joint venture arrangements under which a landowner and a promoter seek to maximise land value before sharing the profits of an onward sale.

Under the terms of such an agreement, the landowner contributes the land and relies on the expertise of the promoter, who must endorse the site for planning at its own expense and risk. Ultimately, it provides a framework for the marketing and sale of the consented site, before the net sale proceeds are then split between the parties in agreed proportions.

The collaborative nature of promotion agreements helps to overcome the potential for conflict between a landowner and developer inherent to an option agreement, however attention to detail is crucial to ensure the landowner’s interests are protected.

What are the advantages?

• The landowner benefits from the skill and expertise of the promoter, who is required to do the legwork.
• The cost and risk of the planning process falls on the promoter, who will be motivated to achieve results as costs will only be recouped on completion of an onward sale.
• Both parties share the common goal of maximising land values and minimising planning and infrastructure costs. Under an option agreement, the landowner and developer are pitted against each other in agreeing the sale price, with the landowner wanting to keep land value high and the developer seeking a lower value.
• Sale of a consented site on the open market guarantees that the best price is obtained. An option agreement typically relies on a set of agreed assumptions to determine market value.
• The parties may agree to delay sale if market conditions are not favourable. Under an option agreement, a developer may take advantage by exercising its option to buy in a weak market.

Are there any traps to be aware of?

• Tax – the landowner will need to recover VAT which the promoter will charge on its promotion fee. This will necessitate VAT registration and “opting to tax” the land. You’ll also need to consider the Capital Gains Tax implications of a sale and any reliefs which may be available, therefore early tax advice is critical in ensuring tax efficiency.
• Deductible costs – the promoter’s costs will be deductible before division of the net sale proceeds. The agreement must ensure that deductible costs are reasonable and sensible caps are agreed, while a promoter’s internal costs should be excluded.
• Competing sites – promoters often endorse multiple sites simultaneously. The agreement should prevent the promoter from endorsing other competing sites which could prejudice a successful outcome.
• Aligning objectives – there is often a balance to be struck between achieving the quickest results and maximising returns. Care should be taken to ensure the parties interests are aligned and controls are in place.
• A weak market – the agreement must contain a minimum sale price below which the landowner is not obliged to sell. This will usually be based on price per gross (or net) developable area within a consented scheme.

As ever, every case is unique and advice at an early stage is key to ensuring the best outcome is achieved.

If you’re a landowner looking for information or help with drafting a promotion agreement, please get in touch with our agriculture & estates, and strategic land & development teams. We’d be happy to help.

Our Legal 500 and Chambers-rated agriculture & estates team help businesses or individuals operating in the rural sector, advising on a broad range of challenges that may arise.