Option vs. Promotion Agreements: How Small Developers Capture Land Value Uplift

Land Options vs Promotion Agreements: A Practical Guide

An option agreement gives a developer the right, not the obligation, to buy land at a set price within a defined period. A promotion agreement appoints a promoter to fund and secure planning permission and then sell the land on the open market, with proceeds shared by formula. Both structures target land value uplift, the spread between existing-use value and a consented, market-tested value.

Small developers use options and promotions to reach planning gain without buying land up front. The contracts decide who runs planning, who sets price, and how the money flows. If you get those three wrong, the deal drifts, value leaks, and financing becomes harder on cost, timing, and certainty. This guide explains where each structure fits, how the economics work, and what lenders, accountants, and counterparties will expect.

Where Each Structure Fits and Why It Matters

Options suit developers who want control and can fund or pre-sell the land on exercise. The landowner accepts a fixed or formula price, and the developer keeps the full margin between that price and the market sale. That delivers upside and speed when planning is straightforward. Promotions suit landowners who want open-market price discovery and small developers who prefer not to fund a land purchase. They are easier to syndicate because proceeds flow to the landowner at completion and the promoter takes a fee off the top, improving optics and certainty.

Key Mechanics That Drive Outcomes

Options: Control and Timing

Structure: The developer pays an option fee for the right to buy. Price can be fixed, index-linked, or set by an independent valuation formula tied to a consented scheme. The option may be conditional on planning or exercisable at the developer’s discretion for flexibility.
Control: The developer runs the planning strategy, funds consultants, and handles applications and appeals. The landowner provides information, signs Section 106 agreements, and grants site access to maintain coordination.
Exercise: If a satisfactory permission is achieved, the developer may exercise and complete on a defined timetable with agreed adjustments and remedies to preserve deal certainty.
Flow of funds: The option fee is paid upfront or in stages and is usually credited against the purchase price on completion. If the option lapses, the landowner keeps the fee. Overage may give the landowner a later slice if density or value rises beyond agreed thresholds.

Promotions: Market Price and Transparency

Structure: The promoter funds and pursues planning. With a satisfactory permission, the land is marketed under a set protocol and sold to a third-party buyer. Proceeds hit an escrow or landowner account and are paid out by a waterfall for transparency.
Control: The promoter manages consultants, applications, appeals, and Section 106/Community Infrastructure Levy strategy. The landowner holds consent rights on key points. The marketing plan, reserve price, and sale terms are pre-agreed to prevent underselling.
Waterfall: Deductions typically include planning costs, CIL/Section 106, infrastructure and remediation, marketing fees, and sometimes landowner costs. The promoter’s fee is applied to the agreed base, usually net proceeds. The balance flows to the landowner.
Long-stop: If planning is not achieved by the long-stop date, the agreement ends and the landowner keeps the planning outputs without paying the promoter, protecting the downside.

Legal Framework and Practical Protections

In England and Wales, these are private contracts governed by English law. Parties are commonly a landowner and a developer or promoter using a single-purpose company to ring-fence risk. Notices or restrictions at HM Land Registry protect priority, and lenders will ask for security assignments and direct agreements with cure and step-in rights for bankability. Core statutory touchpoints include the National Planning Policy Framework, the Levelling-up and Regeneration Act 2023, Community Infrastructure Levy, Section 106, and local plans. Environmental assessment and condition drafting affect viability and timing, so address them up front.

Title and infrastructure constraints are often deal-breakers. Map ransom strips, covenants, and rights of way early to avoid sunk planning costs. If you uncover title defects or blocking utilities, budget for remediation or negotiate abort rights. Study easements and access rights as they can limit site layout and density.

Economics and the Fee Stack

Options: Pricing and Overage

Option fee: Small relative to land value and sized against exclusivity length, competition, and planning risk. Staging against planning milestones reduces cash burn.
Purchase price: Fixed or formula-based, often using a Red Book valuation with specified assumptions or a residual method with defined inputs. Spell out valuer appointment and disregard clauses.
Overage: Gives the landowner a share of uplift from later events like higher unit counts or lighter affordable obligations. Draft triggers, duration, and enforcement clearly and register protections.
Costs: The developer pays planning and due diligence. The landowner pays title and selling costs only on a sale.

Promotions: Fees and Floor Values

Promoter fee: A percentage of net sale proceeds after agreed deductions. The percentage reflects project complexity and cost risk, aligning incentives with value creation.
Cost recovery: Planning costs are recovered in priority, subject to caps and reasonableness tests, with audit rights for discipline.
Floor value: Some landowners require a minimum land value before sharing to avoid dilution from heavy deductions.

Illustrative Numbers to Benchmark Deals

Assume a planning budget of £1.5 million, with Section 106/CIL as levied.

Promotion case: Sale at £20 million. Deduct £1.5 million for planning, £2 million for CIL/Section 106, and £0.5 million for marketing and abnormals. Net proceeds are £16 million. A 20 percent promoter fee equals £3.2 million. The landowner receives £12.8 million. The promoter’s return depends on spend and time to consent.
Option case: Option price fixed at £8 million with a £0.4 million fee credited on completion. On exercise, the developer pays £7.6 million and sells for £20 million. After £2 million in costs, margin is roughly £10 million before financing and tax. Upside is higher, but volatility is too.

Financing and Lender Focus

Small developers blend equity, planning finance, and either a back-to-back sale or senior development debt. Lenders want security over the option or promotion via assignment and notice, with direct agreements granting cure and step-in. They require registered priority at HM Land Registry to block competing disposals, consent rights over variations and terminations, and escrowed, hard-coded waterfalls for promotion proceeds. Using an SPV helps ring-fence risk and simplifies security packages.

Before planning, lenders discount value heavily and cap leverage against budgeted planning costs and contingencies. For options, they probe exercise triggers, valuation mechanics, and the plan to on-sell without holding the land longer than intended to control tax and liquidity. A concise feasibility pack that includes a current planning program and a clear exit, supported by a simple development feasibility model, often improves credit approval odds.

Accounting and Reporting: IFRS and US GAAP

Under IFRS, options are often executory contracts within the “own use” exemption under IFRS 9. The option premium is a prepaid asset, capitalized into inventory on exercise or expensed if it lapses. Under promotions, the success-based fee falls under IFRS 15. Recognize revenue at land sale when constraints lift and capitalize planning costs as a contract asset to amortize when revenue is recognized. Consolidation is uncommon since promoters do not control the landowner under IFRS 10. US GAAP tracks similar logic under ASC 606 and ASC 815. In both regimes, disclose commitments and concentration risk.

Tax: Working Headlines for UK Deals

SDLT: Option premiums are chargeable consideration. SDLT may be payable by the grantee on grant and credited on exercise. Model cash flow early to avoid surprises.
VAT: Option grants and promoter services may attract VAT depending on the landowner’s option to tax. Build VAT gross-up clauses and check recovery to limit leakage.
Direct taxes: Landowner gains are taxed under CGT or corporation tax. Non-UK owners face UK tax on transactions in UK land. Developers treat profits as trading income. Overage follows the nature and timing of receipts.
Withholding: Usually none on domestic promoter fees. Check cross-border service arrangements for permanent establishment risk.

Regulatory and Compliance Touchpoints

Beneficial ownership: Overseas landowners must be on the Register of Overseas Entities. Confirm status early or registration can block completion.
KYC/AML: Run KYC on landowners and buyers. Monitor flows for sanctions and confirm sources for planning contributions where authorities require it.
FCA/AIFMD: Bilateral promotion is not fund management. Raising pooled capital may trip fund rules and marketing restrictions, so check the perimeter.
Planning compliance: Anchor to the NPPF and local policy. Keep disclosures accurate, as misstatements can jeopardize permissions and value.

Risk Considerations and Guardrails

Planning failure: Long-stop passes with no consent and spend is sunk. Mitigate with early scoping, consultee engagement, and credible appeal strategies.
Overtight permission test: Use objective metrics such as unit ranges, mix, viability thresholds, and a reasonableness override to keep deliverability realistic.
Cost bloat: Set category caps, reasonableness tests, and audit rights. Approve large third-party appointments.
Sales undershoot: Require dual agency, reserve price mechanics, and minimum marketing periods. Allow fallback auctions where useful.
Title and rights: Identify ransom strips, covenants, and access constraints early. Set budgets and abort rights if remediation is uneconomic.
Financing alignment: Allow intra-group assignment and lender step-in on clear terms. Prohibit variation without lender consent.
Change in law: Allocate changes in CIL, Infrastructure Levy, biodiversity, and affordable policy with reopeners and viability triggers.
Tax slippage: Model SDLT on option premiums and VAT on fees up front and register appropriately.
Promoter solvency: Keep the landowner off consultant liabilities. Secure step-in and novation of reports on termination.

Negotiation Focus That Moves the Needle

Options: Price, Exercise, and Overage

Price basis: Choose fixed, index-linked, or valuation-based pricing with valuer appointment and disregard clauses spelled out for fairness.
Exercise mechanics: Define permission parameters, long-stops, appeal extensions, and “best endeavors” without absolute obligations to balance risk.
Assignment and step-in: Permit lender step-in and novation on enforcement. Record consents at signing, not later.
Overage: Nail triggers, duration, permitted disposals, and enforcement via registered restrictions or charges.

Promotions: Costs, Marketing, and Change in Law

Cost caps and recovery: Cap categories, define reasonableness, include audit rights, and clarify recovery if sale stalls due to landowner actions.
Marketing protocol: Agents, timelines, data room standards, bidder diligence, and reserve price determination with expert determination for disputes.
Fee base and sharing: Schedule deductible items clearly and avoid double counting costs embedded in buyer offers.
Change in law and viability: Add reopeners for unanticipated levies or conditions to adjust reserve price or fee.

Alternatives and Hybrids to Solve Edge Cases

Conditional contracts: Mimic options with mutual obligations. Vendors gain more certainty, but financiers face timing noise.
Option with promotion overlay: Exercise and immediately sell through an agreed process with shared uplift. Useful where acquisition will be brief and optics matter.
JV with landowner: Aligns interests through build-out but needs more capital, governance, and capability. Use robust JV agreements.
Overage-only disposals: Simple sale near existing-use value with contingent uplift later. Enforcement quality drives outcome.

Implementation Timetable You Can Actually Run

Weeks 0-4: Heads of terms, pricing basis, long-stop, permission test, fee mechanics, exclusivity, registration, and finance principles.
Weeks 4-10: Diligence on title, access, utilities, environmental, ecology, and heritage. Draft principal agreement, planning protocol, and security. Secure lender term sheet.
Weeks 10-14: Signing, register notice or restriction, sign direct agreements, and set reporting cadence.
Months 3-12+: Planning workstreams: pre-app, design, screening, Section 106 heads, viability, and submission.
Months 12-24+: Determination and appeals, condition negotiations, and reserved matters discharge plan.
Months 18-30+: For promotions, market and sell under protocol. For options, exercise and either sell or fund development under a clean sale and purchase agreement. If unfamiliar, review a concise primer on a sale and purchase agreement.

Fresh Angle: Make Your Deal Lender-Ready on Day One

Ahead of negotiation, assemble a lender-ready data pack that a credit committee can digest in under an hour. Include a one-page planning timeline with critical paths, a two-page cost plan with contingency logic, a single-source valuation basis with back-up comps, and a two-scenario exit showing a back-to-back sale and a funded build option. Attach evidence of registered priority at HM Land Registry, a signed direct agreement template with step-in, and a short tax memo on SDLT and VAT. This is the fastest way to win support for either structure at attractive terms.

How Small Developers Choose Between Structures

Capital: If acquisition capital is scarce and holding risk is unwelcome, lean promotion. If back-to-back buyers and debt are in hand, options capture more spread.
Control vs price discovery: Options maximize control and fix the landowner’s price. Promotions let the market set price but add process and fees.
Planning complexity: Complex, multi-agency schemes with appeal risk point to promotion with capped cost recovery. Clear, policy-backed sites often suit options.
Counterparty preference: Some landowners will not accept formula pricing, others dislike promoter fees. Early tax and governance conversations avoid re-cuts.

Decision Checklist Before You Sign

Priority and step-in: Can you register priority and hardwire lender step-in on day one?
Achievable permission: Is the permission test deliverable within local policy and infrastructure limits?
Tax modeling: Have you modeled VAT leakage on fees and SDLT on option premiums?
Contributions buffer: Are Section 106 and CIL assumptions buffered with contingency and change-in-law reopeners?
Marketing dynamics: Will the landowner accept a transparent protocol and reserve price mechanics, or do they require a floor that weakens auctions?
Report rights: Are third-party reports and IP cleanly assignable if the agreement ends?
Overage enforcement: Are triggers tight and binding on successors through registered restrictions?

Closeout and Records Management

Archive all materials with a clear index, versions, Q&A, user logs, and an integrity hash. Apply retention schedules agreed with counterparties and lenders. On expiry, require vendor deletion and a destruction certificate. Keep legal holds paramount over deletion if a dispute or regulatory review is active.

Key Takeaway

Options and promotions help small developers buy control over timing and price discovery without buying the land on day one. Options concentrate upside and require exercise capital. Promotions spread costs and lean on the market for pricing in exchange for a fee and tighter process. Pick the structure that matches your capital, counterparties, planning risk, and need for control. The best deals look like financeable products: registered priority, lender step-in, clear waterfalls, clean tax positions, and an achievable planning brief. That discipline preserves the uplift when permission lands and lets you bank it.