This paper provides a comprehensive breakdown of promotion agreements, focusing on all critical clauses and mechanisms necessary for successful land promotion and maximising value for landowners and promoters.
Each section requires careful negotiation and drafting to ensure both parties’ interests are aligned and protected throughout the promotion process.
1. Parties to the Agreement
The promotion agreement involves two primary parties:
- Landowner: The party who owns the land and seeks to maximize its value through strategic promotion and eventual sale or development.
- Promoter: Typically a surveyor, developer, or land promotion company that commits resources to obtaining planning permission for the land, enhancing its market value.
2. Land Description and Extent
The agreement must clearly define:
- Site Boundaries: A precise description using a reference to the land registry, OS mapping, or detailed topographical surveys to avoid any ambiguity over the land being promoted.
- Access Rights and Easements: Existing rights, easements, and constraints, such as public rights of way, utilities, or servitudes. Any limitations must be identified as they affect both promotion efforts and ultimate land value.
3. Promotion Strategy and Scope of Works
The promotion agreement should specify the promoter’s responsibilities, including:
- Obtaining Planning Permission: The promoter is responsible for achieving planning permission, which includes preparing a development proposal, master planning, and submitting planning applications.
- Engagement of Consultants: The promoter will typically engage architects, town planners, highways engineers, and environmental consultants. The agreement must address the scope of third-party services and how costs are managed and recovered.
- Public Engagement: A strategy for stakeholder and public consultation as part of the planning process is typically outlined.
- Timeframes: Establishment of a schedule for achieving key milestones, including planning submission, determination dates, and any appeals.
4. Planning Costs and Expenses
Promotion agreements require clarity around costs, especially where the promoter funds the planning process:
- Planning Application Costs: Fees associated with submitting planning applications, including legal fees for drafting Section 106 agreements, Community Infrastructure Levy (CIL) negotiations, and costs of planning inquiries or appeals.
- Reimbursement Mechanism: Promotion agreements often stipulate that the promoter will recover planning costs out of the proceeds of the sale (after planning permission is granted). These costs are typically capped or require transparent accounting.
- Treatment of Abortive Costs: In the event planning permission is refused, there should be a mechanism for allocating abortive costs, either split between both parties or solely borne by the promoter.
5. Minimum Land Value and Valuation Mechanisms
Establishing minimum land value (MLV) and its calculation are fundamental to the promotion agreement:
- Definition of Minimum Land Value: The MLV sets a floor price, below which the land cannot be sold without the landowner’s consent. It is typically based on comparable market evidence of land values with planning consent in similar locations and is often subject to independent valuation.
- Valuation Methodology: The agreement must clearly define the basis for land valuation, including assumptions about the permitted development, potential developer obligations (such as affordable housing or infrastructure contributions), and anticipated sale structures.
- Indexation: Agreements often incorporate an indexation mechanism to ensure that the MLV reflects inflation or increases in land values during the promotion process.
6. Land Value and Distribution of Proceeds
Upon sale of the land, promotion agreements stipulate how the proceeds are distributed:
- Agreed Land Value: This is the open market value of the land with the benefit of planning permission. If a purchaser is not pre-agreed, it should be determined by an independent valuation.
- Sharing Proceeds: Typically, the proceeds from the sale are split between the landowner and promoter. The split is often pre-negotiated, with the promoter taking a percentage (often 15-30%) of the uplift in land value due to obtaining planning consent.
- Premium for Achieving Planning: Promoters may be entitled to a premium or an additional fee for successfully securing valuable planning permission, which compensates them for the financial risk undertaken.
7. Sale Process and Land Marketing
The sale process, once planning permission is secured, must be well defined:
- Appointment of Agent: A mutually agreed agent should be appointed to market the land. The promoter often takes the lead in marketing to developers, ensuring maximum competition and value.
- Sale Conditions: Any sale conditions, including deferred payments or overage agreements, must be agreed upon. Such conditions can materially affect the land value, and careful drafting is required to protect both parties.
- Marketing Strategy: A transparent strategy for marketing the land, targeting housebuilders, developers, or institutional investors should be included. Competitive bidding processes are often used to ensure market value is realised.
8. Premiums, Overages, and Development Uplift
The agreement may include mechanisms to capture additional value:
- Premiums: A pre-agreed payable by the promoter to the landowner to secure the rights to exclusively promote the land through to a successful planning consent. Also, there could be a pre-agreed premium payable back to the promoter once planning permission is achieved. This can be structured as a percentage of the uplift in land value, which aligns the promoter’s interests with those of the landowner.
- Overage Agreements: Overage clauses may provide that if the land achieves a higher value than anticipated (e.g., through subsequent planning enhancements or favourable market conditions), a proportion of this uplift is paid to the landowner. These can be linked to thresholds, such as the number of units developed or a percentage increase in land value.
- Deferred Payments: Where land is sold with deferred payments, the promotion agreement should stipulate how such payments are treated and divided, including whether any interest on deferred payments is shared.
9. Exit Mechanisms and Termination
Exit and termination clauses are crucial to protect both parties:
- Termination Rights: The agreement should allow for termination if planning permission is not achieved within a specified period or if planning costs exceed an agreed threshold. Similarly, provisions for terminating the agreement in case of promoter insolvency should be included.
- Step-in Rights: Some agreements grant step-in rights for the landowner to take over the promotion process if the promoter fails to perform, ensuring that the landowner is not unduly delayed by underperformance.
- Right of First Refusal: In some cases, the promoter may have a right of first refusal to purchase the land upon achieving planning permission, subject to an agreed-upon fair market value.
10. Profit Distribution and Reconciliation
The reconciliation process should be carefully monitored and controlled:
- Profit Calculation: After the land is sold, a detailed reconciliation of the sale proceeds must be conducted, deducting promotion costs, planning expenses, and promoter’s fees to determine the net amount payable to the landowner.
- Profit Share Mechanism: If the promotion agreement includes profit-sharing mechanisms, the agreement must be explicit in calculating what constitutes profit (e.g., after all reasonable costs) and the timing of distributions.
- Audit Rights: Landowners should be granted audit rights to review the promoter’s accounting, ensuring transparency in cost deductions and final profit calculation.
11. Dispute Resolution and Arbitration
Promotion agreements often include dispute resolution mechanisms:
- Dispute Resolution: A structured process for resolving disputes, often through mediation, arbitration, or expert determination. It is recommended to use a neutral third party, such as an independent chartered surveyor, to settle valuation or planning-related disagreements.
- Arbitration Clauses: These are common, particularly for resolving disagreements over land valuation, sharing proceeds, or planning strategy. Arbitration allows for a binding resolution without resorting to lengthy litigation.
12. Confidentiality and Exclusivity
To protect both parties’ interests during and after the promotion process:
- Confidentiality Clauses: Ensure that sensitive information regarding land value, promotion strategy, or developer negotiations is kept confidential.
- Exclusivity: The promoter typically requires exclusivity, preventing the landowner from entering into parallel negotiations with other promoters or developers during the promotion term.
13. Miscellaneous Provisions
Additional clauses that should provide for these issues:
- Force Majeure: Covering unforeseen events that might delay the promotion or sale process.
- Insurance and Liability: Adequate insurance must be in place, particularly where site investigations, geotechnical surveys, or other invasive works are undertaken.
- Assignment: Whether the promoter is allowed to assign their rights under the agreement to another party.
- Letters of Reliance: Letters from the landowners' professional advisory team (prior to the promoter's appointment) that allow the promoter to rely on their work. Equally, letters of reliance from the Promoter's professional advisory team allow the Purchaser to rely on their work.
