Land promotion and option agreements: what you need to know

As attractive as this sounds, option agreements can tie up land for over a decade and bring with them a number of potential pitfalls for those not experienced in this process. Here we outline the most important decisions that anyone considering such a proposal needs to consider.

This year has seen a strong rise in the amount of house builders and land promoters accelerating their search for strategic land across Scotland, which often means approaching farmers to secure an option agreement to promote their land through Local Development Plans (LDPs). John Hill and Neil Dryburgh, partners at Montagu Evans have given their advice to farmer landowners, on what they need to think about if approached with these opportunities.

Who to partner with – house builder or land promoter?

The first consideration for a landowner farmer looking to sell is whether to choose a house builder or land promoter for the sale. There are pros and cons of both.

In broad terms a house builder can demonstrate to the council that they have a clear interest in developing the land and they are not promoting it speculatively. They generally look to take a lower share of the development value, around 10% to 15% although this can be lower with competition. The tricky part is that you negotiate the sale price with them on a one to one basis so there is more reliance on the land value controls and parameters set within the option agreement.

A land promoter, by contrast, will take a higher share of the development value, around 20%. However, when they secure planning permission they will market the site to a number of house builders and hence maximise the land value through a competitive and transparent process, which they have a vested interest in. However, Councils could view their planning applications as more speculative and potentially less deliverable, meaning planning permission is more of a hurdle.

After that, selection of the right house builder or land promoter is the most important thing to consider. Securing planning permission for green belt releases in particular is a complex, long term, time consuming and costly process. Success can be influenced by the amount of resource that can be devoted to promoting the option land. Having the right planning strategy can mean the difference between securing a development housing allocation or not.

As a result, it is important to ensure that the selected house builder or land promoter has the right planning strategy and is prepared to allocate the right level of resource to fund the land promotion.

Anyone approached directly should obtain competing proposals and get each party the set out their planning strategy, financial proposal and resources they will employ on your land. Only then can you to make an informed decision.

Navigating the option agreement

House builders or land promoters usually require their option agreement to last for two Local Plan cycles. At the moment, councils currently have a requirement to renew their Local Plans every five years and therefore currently option agreements will generally last for 10 years, subject to extension where a planning application has been lodged or at appeal and is awaiting a decision.

However on the 25th July 2019, the Planning (Scotland) Act was given Royal Assent. One of the key provisions of this new Act is to extend the requirement to review Development Plans from five years at present to 10 years. This will make it more important than ever to ensure that the party you select to promote your land has a robust planning strategy, as failure to secure a planning allocation could result in a long delay before you can promote the land again.

Option agreements themselves are complex too. They have to take account of multiple variables that are not going to be known until some point in the future. These include matters such as education contributions, affordable housing, unknown abnormal ground conditions, surface and foul water drainage, roads improvements and utility capacity. All these items are costs which can be deducted from the eventual land purchase price if planning permission is secured. These are all opportunities for house builders and promoters to reduce the price they have to pay for your land.

Getting the right advice

Expert advice will minimise these costs and maximise your return. House builders and land promoters will cover your reasonable professional fees incurred in negotiating and documenting the agreement so if you are approached getting professional and planning advice from a surveying practice that understand the housing land market and have a good track record of negotiating option agreements is a good first step. Once planning permission is secured it is equally important that you employ the right surveying practice to negotiate the land price, one that understands the terms of the agreement and has expert knowledge in negotiating abnormal development costs deductions.

There is an alternative approach, too. Every landowner can promote their land directly for a change of use through the Local Development Plan process. Much depends on your financial position because undertaking this work speculatively brings with it greater financial risk. Councils now require an increasing amount of technical information and supporting surveys to assess any submissions to the Local Plan which will add to the cost of promoting your land. The chances of securing an allocation can be assessed by a planning consultant relatively cheaply and a surveyor with the right market knowledge can advise you of the marketability of your land with the benefit of a planning permission.

All these options have one thing in common, however: it pays to take early advice on the potential of land to ensure optimal chances of securing planning permission and maximise land value. You only sell your land once.