When you are thinking of purchasing land, perhaps with the intention to develop, but only wish to proceed subject to certain events occurring (e.g. the grant of planning permission), you may wish to either:
- Obtain an option over the land in question; or
- Enter into a conditional contract.
An option can provide you with the means to call upon the landowner to sell the land in question. This type of agreement is more flexible from a buyer’s point of view in contrast to a conditional contract, as depending on the drafting, it gives you the option to call for a transfer of the land but does not oblige you to do so. This will be to your advantage if you are no longer in a position to purchase, or you simply change your mind. However, the option agreement will still compel the landowner to sell the land to you if you decide to exercise the option.
There are certain points that you should consider when negotiating terms for an option agreement, such as:
- If there will be an option sum payable to the landowner (e.g. a premium for the option);
- The option period (e.g. how long you will have to exercise the option and purchase the land);
- Whether the option will enable you to purchase the whole or any part of the land; and
- Whether the landowner is to be involved in any planning process.
It is a matter of negotiation as to whether an option sum will be payable on exchange and if so, the value of the option sum payable. You may also wish to have the land valued. You will wish to pay as little as possible but a seller will doubtless require consideration for the grant of the option which will restrict the seller’s ability to deal with the property during the option period.
The option period will be the period in which you will have the ability to trigger the option and proceed to purchase the land. You will be required to serve an “option notice” on the landowner, at which point a deposit will usually be payable and a binding contract will be entered into. In the event that you do not serve an option notice within the option period, the option agreement will become null and void and the landowner will be free to sell the property to any third party as they wish.
Option agreements are often appealing to developers wishing to obtain planning permission or third-party financing, as it provides them with the flexibility to not proceed with the purchase in the event that satisfactory planning permission is not granted, or they are unable to obtain satisfactory funding.
The buyer’s interest under an option agreement can also be registered against the title to the land in question, providing the developer with a level of protection (as any third parties will be notified of your interest).
As well the advantages to developers, there are also advantages for landowners, which makes option agreements an attractive choice. A landowner can request an option sum to be paid on the date the option agreement is exchanged. The option sum is usually retained by the landowner if the developer does not exercise the option and, in addition, if a developer applies for planning permission and decides not to proceed, the landowner will have the benefit of the planning permission at no cost to them. This may also have a positive impact on the value of the land.
A conditional contract is a binding agreement, requiring the buyer to purchase the land once certain conditions have been satisfied. The most common type of condition is the grant of satisfactory planning permission. The “condition precedents” will specify when the contract will become unconditional, at which time the buyer would need to perform their obligations under the contract and complete the purchase of the land.
There would need to be a “long-stop date” in the contract, as a contract cannot run forever. This would be the date on which the contract would be determined in the event that the condition precedents are not met. Once the long-stop date has passed, the contract will automatically determine without the need for either party to terminate the same.
It is important to note that, unlike an option agreement, once you have entered into a conditional contract, you will be compelled to complete the purchase once the condition precedents are satisfied. This may only provide you with a short amount of time to obtain finance (if required). Therefore, you would not simply be able to withdraw from the transaction if your circumstances change.
If you are considering entering into a conditional contract or option agreement, or would like to discuss your options, please do not hesitate to contact our Commercial Property Department on 01702 338338, 01277 500123, or 020 8049 5888.
This article does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. If you require specialist advice on this topic, please contact us to discuss how we may assist you.