Our Option Agreements Service
Option agreements over property or land can be positive for both the landowner and the developer, but careful drafting is required to avoid potential pitfalls.
Whether you are a landowner seeking to maximise the value of your land or a developer looking to explore the viability of a project before committing to buy the land, we can assist with all aspects of option agreements, as well as other contract options such as conditional contracts, overage agreements and pre-emption agreements.
Our commercial property team has extensive experience in helping draft option agreements for landowners and third parties (often developers). We provide bespoke, expert advice to all our property clients. Our expert commercial property solicitors will give you clear, concise and practical advice tailored to suit you.
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Our Option Agreement Experience
- Acting for neighbouring rural landowners in connection with the grant of long-term option agreements over parts of their land for an innovative gas storage scheme. The option agreements provided for calculation of the sale price by reference to the Retail Prices Index and included provisions for crop loss compensation.
- Acting for a developer in connection with an option to purchase two separate parts of the seller’s title at different prices. The option agreement provided for extensions to the option period to tie in with the timeframes for the developer’s planning application and any appeal or call-in.
- Acting for both landowners and developers in connection with the variation of existing option agreements, for example to extend the option period to allow for planning consent to be determined.
- Our specialist property litigation solicitors are experienced in advising developers in connection with the exercise and service of option notices to ensure that the notice is valid.
What is an Option Agreement?
An option agreement is a legal contract between a landowner and a third party (often, but not always, a developer). An option agreement gives the developer an option to buy a property on pre-agreed terms, by serving notice on the landowner during the option period.
The option may be exercisable at any time during the option period or only when a certain event occurs, such as the developer obtaining the required planning permission.
The length of the option period is a matter of negotiation between the parties. The purchase price for the property can be agreed between the parties at the outset with a fixed price given in the option agreement.
Alternatively, the agreement may contain a mechanism for calculating the purchase price at the point when the option is exercised, usually based on market value at that time.
An option agreement is a binding agreement entered into between the parties, however, the decision whether to exercise the option or not is at the developer’s discretion. Careful thought needs to be given, and professional advice sought, to several different aspects of the option agreement.
Pros and Cons of Option Agreements
What are the advantages for landowners?
Landowners can require the third party to pay an option fee in return for the landowner tying up the property for the option period.
The option fee can be a significant amount and is retained by the landowner whether the option is exercised or not.
Usually, the option fee is in addition to the purchase price payable for the property if the option is subsequently exercised.
A developer is likely to be experienced in applying for and obtaining planning permission, and the landowner can capitalise on this.
The developer will apply for planning permission at its own cost and risk and, once planning permission has been obtained, the property will have increased in market value.
Landowners should also consider entering into an overage agreement, whereby the landowner is entitled to a share in any increase in the value of the property that is realised after the property has been sold to the developer.
Overage payments are usually triggered if a developer obtains further planning permission in the future.
What are the disadvantages for landowners?
During the option period, the landowner cannot sell the property to anyone else. The option agreement is also likely to place restrictions on the landowner’s ability to deal with the property in other ways, such as granting tenancies or refinancing the property.
A landowner cannot cancel or terminate an option agreement, and instead must wait until expiry of the option period before it is able to deal with the property again.
There is no guarantee that the developer or prospective buyer will choose to exercise its option and buy the property. If the developer fails to obtain planning permission for its proposed commercial or residential development, or where the permission is granted subject to onerous conditions, the developer is unlikely to exercise the option.
There is a risk that the landowner may not end up with a sale at the end of the option period, despite having sterilized the land for many years. Landowners and their professional advisers should bear this in mind when agreeing the option fee and length of option period, to avoid substantial cost.
There may be other types of arrangements more suited to give effect to the intentions of the parties, for example, conditional contracts or pre-emption agreements.
Every transaction is different, and professional advice should be sought as to which type of document best suits the particular circumstances of the transaction.
Our Commercial Property Team
Home-grown or recruited from national, regional or City firms. Our commercial property solicitors are experts in their fields and respected by their peers.
Joanne is a Partner and Head of our Commercial Property Team
Ian is a Legal Director in our Commercial Property Team
Charlotte is a Senior Associate in our Commercial Property Team
Sarah is a Senior Associate in our Commercial Property Team
Emily is a Senior Associate in our Commercial Property Team
Sarah is an Associate in our Commercial Property Team
Sidrah is an Associate in the Commercial Property Team
Donna is a Senior Legal PA in our Commercial Property Team
Jessica is a Legal PA in our Commercial Property Team
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