The main types of development agreements are:
- Conditional contract
- Promotion Agreement
By entering into an option agreement, a landowner is giving a developer the right during a period of time (“Option Period”) to exercise the option and thereby purchase the property. During the Option Period the developer will be looking to obtain planning permission for the intended development. The agreement gives the developer the choice of purchasing the property within the Option Period whether or not planning permission is obtained.
A normal contract to sell and purchase property can be expressed to be conditional on obtaining planning permission. The developer as buyer will be obliged to complete the purchase if planning permission is obtained. If planning permission is not obtained, the contract will terminate, unless the developer has chosen to waive the condition of obtaining planning permission. There is less flexibility for the developer with a conditional contract than with an option as the developer has to complete if the planning permission is granted.
A promotion agreement is an agreement between a developer/land promoter and a landowner. In this agreement the developer/land promoter agrees to try and obtain planning permission and market the property for sale. If permission is obtained the land will be sold and the developer/land promoter is reimbursed their costs and receives a proportion of the proceeds of sale. Promotion agreements are a developing area.
Considerations for all types of Development Agreements
- The landowner’s ability to deal with its property during the period of a development agreement is usually curtailed to protect the developer. For example the developer will not want the landowner to sell to someone else without the new purchaser being bound by the development agreement. The developer will not want new rights granted over the property unless they will end before the developer purchases the property.
- Owing to the length of time development agreements are in place, careful consideration needs to be given to:
- Whether a sum (and its amount) should be payable by the developer to the landowner for entering into the development agreement and if this amount is to be kept by the landowner if the developer does not purchase the property.
- (for Option and Conditional Contracts) Whether the purchase price should be a fixed purchase price or the development agreement should provide for a method of calculating the purchase price once planning permission has been obtained. The latter may be more beneficial to the landowner where land prices have increased but the parties are likely to incur additional fees in agreeing the purchase price once planning has been obtained and there is then the possibility of a dispute over the mechanism of calculating the purchase price.
- Like any other contract, development agreements must have an end date and so consideration should be given to the length of time the developer will be afforded to obtain the planning permission. The parties should factor in the timescales of possible appeals and judicial review. Often the agreement will provide the developer with a period to obtain planning permission with the ability to extend this for a further short period in case a decision is awaited or a judicial review period has not expired.
The above are just a few of the main issues to consider when entering into a development agreement. There are others and we would advise parties to instruct a land agent to assist with the negotiations of the main terms of a development agreement in order to protect their interests. As solicitors we would ensure the development agreement accurately records the terms negotiated.
For further information or advice regarding development agreements, please contact our experienced Commercial Property Department at Russell & Co.