Option Agreements – What are they?

The ‘Option’

An Option Agreement is where a potential buyer of land / property enters into a contractual agreement with a landowner for the ‘right to buy’ their land/property.

The buyer then has a contractual option to purchase the land within a specified option period and on agreed terms as set out in the Option.

The buyer will usually pay the landowner an option fee as consideration for them agreeing to enter into the Option Agreement.  However, the amount of the option fee and the length of the option period are matters to be negotiated between the parties taking into account prevailing market factors and the local planning landscape.

Option agreements are often used by developers who are interested in purchasing land for development.  Once a developer has been granted an Option, they will use the option period to apply for and secure the necessary planning consents required for a proposed development.  Whilst the developer incurs all the costs associated with the planning process, they have the comfort that should planning be secured they can trigger the option and purchase the land.

Pros and Cons

Ultimately the developer has discretion as to whether they choose to exercise the Option and they are unlikely to do so should they not secure a satisfactory planning consent or if the proposed development becomes commercially unviable.

So whilst the landowner would retain any option fee paid at the outset regardless, there is a risk to the landowner that they enter into an agreement for a number of years, restricting them from selling the land to any other interested party, but without the guarantee of a sale at the end of the option period.

However, the developer will apply for planning consent at their own cost and risk which allows the landowner to propose their land for development without having to go through the lengthy and costly process of obtaining planning consent themselves.  They can take advantage of the experience and skill the developer has in obtaining planning consent for the land and benefit from the enhanced sale value.

Drafting

Option Agreements should be drafted very carefully to ensure the option accurately reflects all the terms agreed between the developer and the landowner.  

The Option should clearly set out the mechanism for determining the sale price of the land should the Option be exercised, specifically taking into account the enhanced market value of the land with the benefit of the planning consent secured by the developer.

The Option should also contain suitable obligations on the developer to ensure they actively take reasonable steps to secure a satisfactory planning consent within the option period, otherwise there is risk to the landowner that the land gets ‘tied up’ without proactive planning procurement action being taken.  The Option should further require the landowner to enter into any agreements with the local authority which are necessary to secure a planning consent, on the proviso the landowner is not liable under those agreements once they have sold the land.

Overage

A further point which may need to be considered when granting an option is whether potential future development and profit needs to also be considered. Once the Option is exercised and the option land sold a landowner has no further recourse to any further uplift in value of the land.  That may be perfectly fine if the consideration paid is considered acceptable. 

However if the landowner is of the opinion that there is a real potential for  example: (a) new planning consents being obtained in respect of the land which will provide added profit for the developer or (b) variations being granted to the planning consent obtained by the developer during the option period then they may in these circumstances wish to secure a share of such added profit.

Option Agreements will sometimes therefore include a provision for uplift/overage to be entered into on the sale of the option land to protect the landowner from missing out potential further future increases in the value of the land. For further information on overage agreements please see our article: Overage Agreements: Mind the Gaps!

These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.