This article is the third part of my series of articles on creative contracts. If you haven’t already, please do read my first and second articles in this series. As I’ve already written about the background in the first articles, I thought I would dive right into other creative contract structures in this article, along with some case studies.
A promotion agreement is usually entered into between a seasoned developer or planning consultant (the ‘promoter’) and the owner of the property. Invariably, the property involved is land but it could include under-developed existing buildings. The objective of the agreement between the parties is for the promoter to apply for planning permission for a development on the property followed by the marketing of the property for sale on the open market once planning permission has been obtained.
The promoter funds the planning and marketing costs initially. If planning permission is obtained, the property is sold or, through an in-built option to purchase (see my first article), the promoter may purchase the property at a fixed price or the open market value of the property, depending on which is agreed. The price agreed will usually include the uplift in value as a result of planning permission being granted.
If planning permission is not obtained by a certain date, the agreement automatically terminates and the promoter’s costs are not reimbursed to the promoter - it being absorbed as a commercial risk/expense.
In the event of a sale in the open market, the promoter’s costs are reimbursed to the promoter out of the gross sale receipts and the promoter receives a proportion of the net sale proceeds.
If the promoter exercises the option and acquires the property, then the benefit to the promoter (the proportion of the net sale proceeds) is delayed until a subsequent immediate sale or the promoter builds out the development then either sells it wholesale or as new-builds to end-buyers. Another option is for the promoter to adopt a build to rent scheme, in which case a likely smaller benefit to the promoter will be realised when the promoter refinances the scheme - assuming some equity is left in the deal.