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What is an Option Agreement?

An Option Agreement is a legally binding contract between two parties – the landowner and the purchaser (often a developer) of the option.

In summary, an option agreement provides a mechanism for a potential land transaction, allowing the buyer to secure the right to purchase the property within a specified timeframe.

  • Purpose and Structure:  The agreement clearly defines the responsibilities of both parties.  It obliges the parties to follow the agreed terms. The purchase price is often determined by valuation, which is typically lower than the market value to reflect cost and risk to the purchaser. The actual purchase can only take place within a set timeframe and after specific conditions have been met, such as obtaining satisfactory planning permission.
  • The Buyer:  The prospective purchaser enters into the agreement with the landowner, and as part of the agreement they will usually pay a sum of money as an option fee.  The fee grants the purchaser the right (within a defined period) to buy the land or property for future development and gives them control over the planning process to ensure it meets their needs.
  • Option Period:  The agreement specifies a timeframe during which the prospective purchaser has the option to purchase the land.
  • The Landowner:  The agreement states that the landowner will give the purchaser the option to purchase the land. In exchange for this, the landowner will receive an option fee. This agreement gives the landowner the comfort of having the site promoted for development by the purchaser, as well as the potential for future pipeline and security. The landowner will also have some control over the planning process to ensure it aligns with their requirements.

Planning and price determination

In many cases, the option agreement is centred around the planning process, which involves the promotion of a particular site.  The next step is often (but not always) to obtain satisfactory planning permission. Once this is achieved, a Price Notice is issued to the landowner, which initiates price negotiations. The final price is sometimes calculated by reference to a percentage discount from the market value, which includes additional deductions for an option fee and planning promotion costs.

Price Negotiation Challenges

When it comes to selling land, the value is not determined by external factors such as competing bids on the open market. Instead, it depends on what was set out in the option agreement and that often sets out that the landowners and the purchaser negotiate the potential market value, taking into account factors such as development costs and the purchaser’s expected profit. Local market conditions and comparable land transactions are also analysed to determine a fair price. In addition, a minimum price provision can be put in place to ensure that the land is not sold unless a certain threshold is met.

Independent Determination Process

Many option agreements will stipulate that if agreement on the purchase price isn’t reached, an independent expert or arbitrator (often a chartered surveyor) is appointed.  Both parties submit written representations, and the expert assesses market value within strict timescales.

 

For more information, contact:

Martin, Matt or Rhega in the Development Team

Jeremy, Michael or Paul in the Dispute Resolution Team

 

Posted on 28 May 2024
by Martin Jordan

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