Land Development: What is an Option Agreement?

 

Option Agreements

An option agreement is where a Developer enters into an agreement with the Landowner for the right to buy the Land for a set period of time, usually in exchange for a non-refundable sum of money being paid to the Landowner (an option fee).

These agreements provide the Developer with a lot more flexibility, as there is no legal obligation for them to ever purchase the Land unless they decide to exercise the option. The Developer will often enter into an option agreement, and then seek to secure the grant of a planning permission within the option period, before proceeding to exercise their option. If a Developer obtains planning permission but does not exercise their option, the Landowner will still benefit from the planning permission(s), as planning permissions run with the land, and are not attached to the initial applicant of the planning application.

Things to consider when negotiating an Option Agreement

Some of the most important points to consider when negotiating an Option Agreement are:

1. The Option Sum

• This is the fee paid by the Developer to the Landowner, in order to secure the option period. Is this refundable? Should it be deducted from the purchase price if the option is ever exercised? What happens if the option period is extended?

 

2. The Option Period

• This is the period in which the Developer has the sole right to buy the Land.

• The Landowner must consider how they will be using the land during the Option Period. A Developer will need to make sure that such use will not prejudice their ability to develop the land, if they were to exercise their option.

• How long will the Option Period be? A Landowner should be wary of agreeing a long Option Period as they will find it very difficult to sell their land during the Option Period, even if the Option Agreement allows this. However, a Developer will want as long a period as possible with the ability to extend it in certain circumstances.

• Since 6^th April 2010, there has been no maximum permitted Option Period (prior to this date, Option Periods could not exceed 21 years).

 

3. The Purchase Price

• It is imperative that the Landowner and Developer agree on a detailed payment plan, to avoid any future surprises or disputes.

• The purchase price is often either:

  • a fixed amount;

  • an agreed amount per acre or percentage of the Land sold; or

  • the market value of the Land at the time of the option being exercised.

The Landowner and Developer must also negotiate whether the Option Sum shall be set off from the Purchase Price too (especially in situations where there a significant Option Sum has been paid).

4. The Land Included within the Option Agreement

• The Landowner and Developer will need to negotiate whether the exercising of an option will allow for the Developer to purchase a part of the Land subject to the Option Agreement, or whether the Developer must purchase all of the Land when exercising the option.

• The Landowner must also consider the effect on the value of the remaining unsold Land if the Developer only seeks to purchase part of it.

• If the Option Agreement allows for the Developer to purchase the land in tranches, the Landowner must also account for the fact that there will be a further delay in receiving any sales proceeds.

 

Key Points

Developer and Landowners should take professional advice from a land/commercial property agent on the commercial terms at the outset. They should also obtain specialist tax advice before agreeing the Option Agreement so both parties know their tax liability, particularly for the Landowner.

Contact Us here for more information or assistance

Dylan Mann, Commercial Property
Lawson West Solicitors, Leicester

Our lawyers have years of experience dealing with Option Agreements and work closely with other professionals to make sure the transaction is structured in the best possible way so any Landowners or Developers considering an Option Agreement should get in touch with our Commercial Team today.

This article is not intended to be legal advice and cannot be relied upon or applied to any set of circumstances. For further guidance, please contact Lawson West Solicitors Limited.

View all