Option, Promotion Agreement or Conditional Contract?

When buying or selling development land, there are various different legal agreements which can be used to achieve the parties’ desired outcome. 

Here, we look at the three most common: a conditional contract, an option and a promotion agreement.

Conditional Contracts

If the conditions in a conditional contract are satisfied (or, if applicable, waived), a binding contract for the sale and purchase of land will exist between the parties, which the seller can enforce in court. For a development site, the key condition is likely to be the grant of an implementable planning permission which is satisfactory to the parties and authorises the development of the property in question. A planning permission will be “satisfactory” if it meets certain objective criteria, as agreed between the parties.  

Sellers should beware of any element of subjectivity introduced by a developer regarding whether a condition is satisfied or not. Such subjectivity on the part of a developer may inadvertently have the effect of making the conditional contract an option agreement, and it should be avoided by sellers.

A conditional contract is usually more advantageous to a seller than an option because it gives the seller greater control over the planning process and more certainty about the ultimate sale price.

The Options

If a seller grants an option to a developer, the developer is free to exercise the option to purchase the development site, usually in their absolute discretion.

The quid pro quo for this imbalance in control between the parties is that a seller will almost always insist on receiving consideration from the developer on exchange (usually in the form of a non-refundable “Option Fee”). The developer speculatively promotes the development site at their own cost and risk.

The ultimate purchase price for the land will usually be the market value of the property with the benefit of planning consent, as agreed by the parties. Market practice is for the market value to be determined in accordance with RICS Redbook Valuation standards and in default of an agreement by the parties, determined by an expert or settled by arbitration.

Promotion Agreements

In a promotion agreement, the developer agrees to promote the development site by obtaining planning permission. Following the grant of planning permission, the development site is sold to a third party on the open market with the benefit of that permission.  

Generally speaking, in a promotion agreement, the seller and developer’s interests are more aligned, as it is in both parties’ best interest to secure the most valuable planning consent and, consequently, the highest possible sale price for the property.

There are benefits for the developer in having a promotion agreement, particularly concerning its risk exposure. The developer 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.

Sellers benefit from the development site being market-tested in the hope that this will achieve a higher sale price. This aspect of a promotion agreement can be a significant advantage for the seller.

If you would like to discuss legal services relating to buying or selling development land, please get in touch. I can be contacted on 0330 818 3090 or via email at [email protected].