Option and promotion agreements tend to be two of the most popular arrangements. But what is the difference? And when should you choose one over the other?

Option agreements

Under an option agreement, a landowner typically gives a developer the right to buy their land within a specified timeframe (usually five to 10 years but it can be longer if required).

In return the developer will take on various obligations at their own cost – such as applying for planning permission – and if successful they can then decide whether or not to purchase the land. 

The price they pay can either be negotiated once planning permission is granted (usually at a pre-agreed discount to open market value), or it can be fixed at a minimum figure.

Promotion agreements

A promotion agreement is similar to an option, except the promoter is not usually a builder/developer, but instead a company or individual that specialises in land promotion. Once planning permission is granted, they will take the land to market with the landowner and sell to a third party.

The landowner is legally bound to sell the site and all proceeds of any sale are then divided between the landowner and the promoter – but only once the promoter’s planning and professional costs have been reimbursed.

Pros and cons

There is a belief that promotion agreements tend to favour the landowner as both parties are keen to achieve the best price possible for the land. This is because it is sold on the open market and is therefore subject to a competitive bid process.

In an option agreement the pricing exercise is undertaken by negotiation and a paper valuation by referring to firm evidence of the local land market. Typically, the developer will want to pay as little as they can, whereas the landowner will want to maximise value. This price negotiation can therefore sometimes be a lengthy process. 

While the competitive nature of a promotion agreement is usually a good thing, the potential downside is that the promoter may not necessarily be best placed to understand what local developers are seeking. The risk being that vast sums of money and time are spent achieving a planning consent for a scheme that developers are reluctant to build – either because it does not meet the needs of the local market or because it is economically unviable. 

Often an important factor in promoting a plot of land can be the ability to prove the deliverability of a scheme to the local authority. In these circumstances partnering with a credible developer under an option agreement could prove more beneficial.

When negotiated well, both agreements can secure a satisfactory outcome. But the specific circumstances of the land, its location, local market characteristics and the planning legacy of the area should all be considered, which is why it’s always sensible to seek professional advice as early as possible in the process.