Methods of Securing Payments under a Land Promotion Agreement

Rebecca Mason, development and land specialist and head of Holmes & Hills' team of specialist Commercial Property Solicitors, discusses the issue of securing payment under Land Promotion Agreements.

Over the last few years we have noticed an increase in the use of Land Promotion Agreements, largely due to pressure on certain pockets of land to be brought forward for future development.

Typically, a Land Promotion Agreement allows a Promoter to share in any increase in a property’s value that is realised when the property is sold, with the benefit of planning permission. Under a Land Promotion Agreement, a developer, or land promoter, typically agrees with a land owner to apply for planning permission for development on the land owner’s property and to market the property for sale on the open market, once planning permission has been obtained. It will be usual for the promoter to fund the planning and marketing costs initially. Typically, if planning permission is not obtained by a certain date, the agreement terminates and the promoter’s costs are not reimbursed by the land owner. However, if planning permission is obtained, the property is sold and the land owner reimburses the promoter’s costs, out of the gross sale receipts from the sale and pays a proportion of the net sale receipts to the promoter.

Promoters will want to ensure that the land owner’s obligation to pay the promoter’s share is secured effectively, as without adequate security the land owner’s obligation to meet those costs, and to pay the proportion of net sale receipts to the promoter, may be worthless.

This Article will take you through some of the methods available to secure the future payment. Each method has its own advantages and disadvantages. In addition to the methods mentioned below, there are also more complex methods that can be used, involving the setting up of companies or joint ventures, but I do not cover them here.

Personal Obligation

This is the usual way to secure payment under a Land Promotion Agreement. The Agreement will simply contain a contractual commitment on the land owner to pay the promoter’s share to the promoter, if satisfactory planning permission is obtained and the property is sold with the benefit of that permission. However, such covenant does not generally run with the land, and bind successors in title, and as a result, is generally inadequate so far as the parties are concerned. The contractual obligation depends upon the financial strength and continuing existence of the land owner and provides no security to the promoter for payment. Having said that, if the land owner is a substantial body and its assets have been fully investigated, then a promoter may be satisfied that the land owner is likely to remain financially strong for the length of the promotion period. Occasionally personal obligations are also supported by bonds or guarantees, and I will mention those below.

Positive Covenant and Restriction

In addition to the personal obligation referred to above, a land owner in a Land Promotion Agreement can covenant with the promoter to ensure that its successors in title will enter into a similar commitment with the promoter. This would mean that the promoter could enforce the land owner’s obligations under the Land Promotion Agreement against the land owner’s successors in title. The promoters would be protected as a restriction would be placed on the land owner’s title at the Land Registry. The restriction will be released when the promotion period expires, or the Land Promotion Agreement is terminated. This method is often used in conjunction with a buyer giving a legal or equitable charge to secure the future payment.

Mortgage or Charge

The promoter could take a charge over the property, following exchange of the Land Promotion Agreement. The legal charge must ensure that it contains a clear redemption date, or trigger, for the payment of the promoter’s share. One careful consideration a promoter needs to think about, is what happens if the land owner breaches the land owner’s obligations in the Land Promotion Agreement. In these instances, the promoter needs to make sure the security is enforceable, so that they can sell the land and recover their share from the sale proceeds.

The parties should also consider carefully when the charge must be released by the promoter. It should be released when the land owner pays the promoter’s share out of the sale proceeds, but the promoter should also release the charge if the Agreement terminates without default by the land owner, for example failure to obtain satisfactory planning permission by a certain date.

A first legal charge in favour of the promoter can be the most effective form of security, however, where the land owner has borrowed, or will want to borrow in the future.

Guarantee or Bond

A third party guarantee may be provided by the land owner as security for the payment of the promoter’s share. If the land owner does not comply with its contractual commitment to pay the promoter’s share to the promoter, the promoter can have recourse to the guarantor. However, a guarantee depends on the financial strength and continued existence of the guarantor. This may therefore not be adequate security for the promoter. In addition, it is not always easy for a land owner to find a guarantor and parent companies are often unwilling to provide such guarantee. A bond from a bank or financial institution could be provided by the land owner, but bonds are expensive to obtain. Bonds and guarantees are not suitable where the amount of the potential payment to the promoter, and the time period over which the bond will be needed, are both unknown. It is rare you can find such institution willing to guarantee such an open-ended commitment.

Option

The Land Promotion Agreement could include an option being granted to the promoter to secure the payment of the promoter’s share. The promoter can then require the land owner to sell the property to it, once the agreed trigger has occurred. The sale price will reflect the fact that the promoter is to share any increased development value due to planning permission having been obtained. The option is released by the promoter in return for payment from the land owner. The option is then protected by registration of an agreed notice, or unilateral notice, against the landlord’s title.

Restrictive Covenant

A further option is that a land owner covenants with the promoter that it will not build on the land, or use it for particular activities. The land can only then be redeveloped or used for the prohibitive activity, if the covenant is released. In return for entering into a Deed of Release, the promoter can demand a payment. Once payment has been made, the covenant will be released. This method is more likely to be used when there is no immediate prospect of development. As long as the covenant is restricted in nature, it will run with the land and bind the land owner’s successors in title.

There are, however, several issues with this method. The promoter must own some land that genuinely benefits from the restrictive covenant. A ransom strip is insufficient for this purpose. Courts generally will not enforce restrictive covenants where the principle aim is to obtain payment in return for a consent, or a release of the covenant, as opposed to genuinely preserving amenity of land.

It is possible that courts will also imply a term that the promoter cannot unreasonably withhold consent to the proposals. The amount that the promoter can obtain from the land owner will be unknown, until an attempt is made to enforce the covenant. Any damages may only be a small proportion of the claimed development value.

The Lands Tribunal also has the power to discharge or modify a restrictive covenant, if it obsolete, impedes a reasonable use of the land or the discharge or modification or cause no injury.

Ransom Strips

This method is where the land owner transfers to the promoter a strip of land adjacent to, or across, the land owner’s property. This has the effect of preventing any buyer of the land owner’s property from developing the land. A developer would then require access over the ransom strip to the public highway and a buyer will not be able to proceed unless the promoter sells the ransom strip, or grants a right of way over it, for the purpose of development, in return for payment. One hazard, however, with a ransom strip, is that a land owner might be able to negotiate access across neighbouring land, rendering any ransom strip worthless. In addition, the ransom strip’s existence may have an adverse effect on the property’s market value and the amount that the land owner realises on the sale to a buyer. If a land owner needs to raise finance, again it may also cause difficulties.

Even where this method is successful in securing the payment due to the promoter under the Land Promotion Agreement, often the amount achieved by the ransom strip owner may actually be less than expected.

So as you can see, there are many methods of possibly securing payments under a Land Promotion Agreement and each particular circumstance will dictate the one that is most appropriate to the transaction. No method is watertight and, as land promotion is a developing area, the methods listed below, are certainly not exhaustive. More often than not, there is no security for payment and the parties will see it a risk worth taking. However, as land values continue to increase, and more and more promotion agreements are being completed, the importance of securing the future payment of the promoter’s share by a land owner under a Land Promotion Agreement, should not be under estimated.

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Holmes & Hills Solicitors Development and Land Team are based at the firm's brand new regional head office, the A12 Commercial Hub at J25 of the A12, Marks Tey, Colchester.

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