With the downturn in the property market, developers have been turning to medium or long-term strategic options in respect of land. There has been an emergence over the last few years of Promotion Agreements as a popular alternative to the use of the more traditional Option Agreements.
Promotion Agreements are a type of joint venture between landowners and a developer. The developer uses its expertise and funds to "promote" the land with the Local Authority with a view to procuring the preferred allocation for the land in the relevant Local Plan and obtaining a satisfactory planning permission for development of the land. Once planning consent has been granted, the land can be sold on the open market with the benefit of the consent. The net proceeds of sale (having deducted sale costs, reimbursement to the promoter of the costs of obtaining planning consent, any planning gain and other deductible expenditure) are divided between the landowner and the promoter in an agreed percentage. This is usually around 10-25% for the promoter as payment for his expertise and for the risk in pursuing the application for planning consent.
Landowners may find Promotion Agreements more attractive than Option Agreements as the parties work together to maximise the area of the land within the planning consent and to minimise any planning gain, affordable housing requirements and deductible expenditure in order to increase the sale proceeds. Under an Option Agreement, by contrast, the developer is motivated to maximise its own profit by purchasing the land from the owner as cheaply as possible.
Promotion Agreements are particularly beneficial where a developer intends to promote a large area of land for development which is owned by a number of entities. In this situation, the developer need only enter into one agreement rather than having to negotiate and comply with the provisions of numerous option agreements. The various landowners enter into a Landowners' Agreement which sets out the rights and obligations between the individual owners and deals with the distribution of sale proceeds between them. Typically, each landowner receives the same proportionate value for its land regardless of the particular permitted use for that land. This ensures that no owner is prejudiced if its land consists mainly of infrastructure, affordable housing or public open space.
Tax Consequences
Where several landowners join together and share proceeds of sale, a Capital Gains Tax ("CGT") liability arises both (i) on the value of the land owned by each individual and (ii) on the proceeds of sale received by the consortium as a whole. It is therefore worth considering more tax-efficient structures such as a "Pooling Trust" or the use of "crossoptions". A Pooling Trust is a bare trust for holding legal title to land. Ownership of all the land in question is transferred to Trustees and each landowner holds a percentage share in the entire landholding according to the extent of land he has contributed. A disposal by the Trustees gives rise to a CGT liability on the gains of individual landowners according to their percentage share of the whole.
Alternatively, cross options may be granted by each landowner to the other landowners giving each of them a right to acquire a portion of the other's land according to each owners' percentage share of the whole. On disposal, the sale proceeds are divided between the landowners in return for them waiving their options.
Specialist tax advice should be sought in order to establish the most tax efficient structure in the circumstances.
Land Promotion transactions are becoming increasingly sophisticated and complex with a variety of obligations placed on the parties. The agreements cover all aspects of land promotion from the planning process through to the disposal of land once planning has been obtained and realisation of the proceeds of sale. A thorough understanding of the issues that may arise is required so that deals can be negotiated, structured and delivered quickly and accurately.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
