Whatever the causes of and solutions to Britain’s ongoing housing crisis, it is a truth fairly universally acknowledged that we need to build more homes. For those with land to spare, residential development is an opportunity to maximise returns and, hopefully, benefit the local community.
Landowners, by definition, have the land, but they do not always have the expertise, the ready cash to fund the planning process and/or the requisite appetite for risk. Developers on the other hand, despite what you sometimes read in the papers, do not want to start buying up vast tracts of the countryside on spec.
Landowners and developers therefore need to pool their resources for mutual benefit. An increasingly common way of achieving this, particularly for greenfield sites, where development is a longer term goal, is to enter into a “Promotion Agreement.”
In this type of agreement, the developer will (at its own cost) design and implement a planning strategy. Once planning permission is obtained, the developer will find a buyer for the land, recover its costs and take a share of the sale proceeds received from that buyer.
This sort of arrangement can work well for landowners: the developer spends its own money and bears the planning risk, while being incentivised to maximise the eventual return.
However, a promotion agreement is also usually a fairly long term business venture. Before entering into one, landowners should think hard about the following:
- how long you are willing to have your land affected by the obligations in the agreement;
- how much control you want over the planning process. The developer is paying and so will want to run the process, but landowners should think about what they need to approve and what updates are required – for example, you may be retaining land and will be wary of it being negatively impacted by the approved scheme. You will also want to be sure that the promoter is doing what they agreed to do;
- what you need to do with the land in the meantime. Both parties want to ensure that the land is not damaged in any way and vacant possession can be obtained when the time comes, but most developers will be happy for tenancies or licences to be granted, as long as they are terminable. You may also want to transfer ownership of the land, for example, to a family member, so need to cover this off;
- is there a mortgage? If so, the mortgagee’s consent will be required to the promotion agreement, unless the mortgage can be released or moved to other land in the portfolio; and
- what the tax consequences are. Capital gains tax, VAT and inheritance tax may all be relevant and should be considered at an early stage.
Most important of all for a landowner are the underlying commercial terms, not least, what share of the sale proceeds the developer should receive, and what level of payment should it make to the landowner on the entering into of the agreement.Professional advice on terms at an early stage, from a surveyor and a solicitor specialising in this area, will be money well spent – and the cost of this is often recoverable from the developer.
Our Commercial Property and Private Client teams work together to advise landowners on Promotion Agreements and any associated tax consequences. Please contact us for further information.