With a surge in development being seen across the UK

Following the release of the government’s Housing white paper setting out plans to boost the supply of new homes in England, it is perhaps no coincidence that lately we have experienced an increase in the number of enquiries received in relation to land option agreements.

A land option agreement is a contract in which a potential purchaser or developer of land pays the landowner a non-refundable sum of money in return for a legally binding right (but not an obligation) to buy the land on or before a certain date or after certain conditions are met (such as the grant of planning permission).

Option agreements will include a mechanism by which the purchaser may exercise the option to purchase; this is usually effected by serving notice upon the landowner coupled with payment of a deposit.   It is established in case law that any attempt to exercise an option which does not strictly comply with the relevant requirements of the option agreement will be ineffective.  If an attempt to exercise an option is made towards the end of the option period which is later deemed to be ineffective, the option rights may by then have been lost forever.  It is important therefore that option notices are served correctly, and that the service provisions and requirements in the contract itself are clearly and properly drafted.

The recent case of Helix 3D Ltd v Dunedin Industrial Property Nominee Ltd [2016] EWHC 3012 (Ch) provides a good example of the importance of having clear and workable notice clauses in option agreements.

Helix, a tenant, entered into an option agreement with its landlord to purchase the freehold of the commercial premises it was occupying.  The option was exercisable within the first five years of the lease.  The option agreement provided that:

(i)            if the option were exercised during the first two years of the lease, the purchase price would be £1.5m plus VAT; and

(ii)           if the option were exercised in the last three years of the lease, the purchase price would be the greater of £1.5m plus VAT and the open market value of the land.

The agreement provided that the procedure for determining the open market value of the land would be initiated upon service of the option notice.  It was a condition of the option agreement that payment of a 5% deposit accompanied service of the notice.

Towards the end of the fourth year of the option period, the tenant served notice to exercise the option, specifying a purchase price of £1.5m plus VAT.  The notice was accompanied by a deposit payment in the sum of £90,000, being 5% of £1.5m plus VAT.  The landlord argued that the option had not been validly exercised, as the market value of the property at the relevant time exceeded £1.5m, and as a result the deposit received was less than the 5% required by the terms of the option agreement.  The tenant argued that there was commercial absurdity in the drafting on the basis that the mechanism for determining market value would not be triggered until the option notice was served, meaning that at the time of service the amount of the 5% deposit could not be known.  It was the tenant’s case that the option agreement allowed it in the third, fourth and fifth years of the option period to state a proposed purchase price, and to pay 5% of that.  The Court agreed and held that the parties must have intended that the figure on which the 5% deposit was based was a figure ascertainable at the time the deposit was to be paid i.e. the £1.5m plus VAT as stated in the agreement, and that this is what a reasonable person would have understood the agreement to require.  The option notice was therefore deemed to be valid and Helix was entitled to purchase the property for £1.5m plus VAT; clearly if the market value was in fact higher than this, the landlord would have been left out of pocket.

In summary, agreements which are poorly drafted may not reflect the parties’ original intentions and result in unintended adverse consequences. Here at Myerson Solicitors, we are well-versed in the intricacies of negotiating option agreements.  If you are considering entering into an option, please call us to ensure that the drafting is clear and properly reflects the scope of the agreed terms. We are able to assist you in such cases, contact us for specialist legal advice on 0161 941 4000 or email us at lawyers@myerson.co.uk.

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