Securing the Promoter's Interests Under a Land Promotion Agreement
Promotion agreements have become more common over recent years. They are increasingly used in relation to sites which have medium or long term planning potential for residential development. Land developers and promoters are becoming more aware of the need to ensure that the obligations of the landowner in such agreements are enforceable.
How does a typical promotion agreement work?
Typically, promotion agreements work in the following way:-
- the promoter agrees at its own cost to promote the site and apply for planning permission for development;
- the promoter agrees to market the site if and when planning permission has been granted and the landowner agrees to sell it at this point;
- if the promotion has been successful, and the site is sold, then the proceeds of sale will be divided between the landowner and the promoter at that point;
- typically the promoter would be entitled, on the sale of the site, to reimbursement of its planning and other costs, and in addition to receive as its "fee" a proportion of the net sale receipts.
Why is security needed?
The promoter is typically concerned to ensure that two things happen. First that the landowner will agree to actually sell the land once a suitable buyer has been found. Second, the promoter of course wants to ensure that when the land is sold, it will receive the agreed proportion of the sale proceeds.
It is clearly in both parties' interests to sell the land at the best price. However, if the landowner has a change of heart (over perhaps the prospect of a significant housing development on his doorstep), then the promoter would be at risk, given the substantial costs incurred by the promoter up to the point of sale.
Promoters are therefore increasingly insisting upon mechanisms within the promotion agreement which give a degree of protection in these circumstances.
There are various different ways in which the landowner's obligations under a promotion agreement can be secured. Each has advantages and disadvantages both for landowner and promoter.
Land promotion is a developing area. As yet, there have been no decisions in the courts on the effectiveness of the various methods of securing the landowners obligations under land promotion agreements.
A common mechanism is a positive covenant and a restriction on the landowner's title. By this mechanism, the landowner covenants to ensure that its successors in title will give similar positive covenants to the promoter. A restriction is placed on the landowner's title preventing the registration of any disposition, unless a certificate is provided that the deed of covenant has been entered into. This mechanism is commonly used in practice. It does not however, in itself, entitle the promoter to force a sale if the landowner does not wish to proceed.
Another common mechanism is for the landowner's obligations to be secured by the promoter taking a first legal charge over the property following exchange of the promotion agreement. This mechanism would generally not be available if the site was already in mortgage, unless a deed of priority was entered into. The legal charge would need to be carefully drafted to provide what will happen if the landowner refuses to sell the land, how the parties will determine at what point a breach has occurred, and what the promoter would be entitled to receive in that event if the charge was enforced. The perceived advantage with a legal charge is that, unlike the positive covenant and restriction mechanism, if properly structured it would give the promoter the ability to exercise a power of sale.
A residual option for the promoter to buy the land is another common mechanism which promoters seek to include. Typically, this mechanism would give the promoter the option to buy the land if either the landowner refused to sell on the open market, or if the marketing process had been concluded without a buyer having been found. Often the sale price will reflect the promoter's ability to recover its planning costs, as well as the fact that the promoter is to share in the increased development value of the land which has arisen due to the grant of planning permission.
For further advice in connection with promotion agreements, contact Lucy Smallwood - Head of Residential Development and Strategic Land, at email@example.com