What is an option agreement?

With the demand for land on the increase, many landowners are starting to think about how to make their land work for them, and an option agreement is one way of doing this.

Option agreement

An option agreement is a contract that gives a party the right to buy land or property often linked to a specific period of time. This Agreement often ties the seller but does not tie the buyer, meaning the buyer has the freedom to decide whether or not they wish to purchase without having to provide a reason.

For this reason, option agreements are a desirable and flexible instrument for a buyer.

Increase market value

On the flip side, it also enables landowners to increase the market value that is achieved through development, without risking the substantial cost of obtaining planning permission.

Ben Cobb, a Commercial Property Solicitor, based in Frettens' Ringwood office, explains "Without planning permission, the current use of the land cannot be lawfully changed to enable the development to take place. That risk will be taken on by a developer and. this way a landowner can take advantage of using the skills, knowledge and funds of an experienced developer.”

Points for Negotiation

It is important to establish at the outset the key terms of any proposed deal and a commercial property solicitor can assist with this. Examples of things to consider include whether a non-refundable option sum is to be paid on the granting of the option; who will cover legal costs; how the final purchase price will be calculated; any restrictions on development e.g. if a landowner is selling part of their garden to a developer they may want to limit what is built; any uplifts in payment due to the landowner dependent on how many additional units are secured through planning.

Conditional contracts

A conditional contract sets out specified conditions and both parties are bound by the terms from the outset. Formal completion is linked to the satisfaction of the condition. Therefore, a conditional contract provides the seller protection by preventing the buyer walking away if the condition is satisfied.

A developer might enter into a conditional contract with the landowner either to buy or lease the site at a future date. The conditions might include, for example, the developer obtaining the required planning permission and a grid connection offer. When the developer has obtained the necessary planning permission, meaning the contract is no longer conditional, the developer might be obliged to purchase / lease the site.

What are the key differences between option agreements and conditional contracts?

The terms of the option agreement could be principally the same as a conditional contract, but an option agreement will usually give the developer the right to terminate the agreement at any point. Even if the developer has all the necessary consents required to develop the site, the developer would not be obliged to exercise the option. So, the option agreement route can give developers more flexibility than entering into conditional contracts.

My colleague Patsy Whitford has discussed the pros and cons of option agreements and conditional contracts further in her article, you can read that here. 

Our Commercial Property Team are happy to discuss any issues that this raises for you and we offer a free initial meeting or chat on the phone.

If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 or 01425 610100 and Ben or a member of the team will be happy to chat about your situation and your particular requirements.