WHAT IS AN OPTION AGREEMENT?
WHAT IS AN OPTION AGREEMENT?

10 June 2021

An option agreement is a contract between a landowner and a developer where the developer has the opportunity (but not an obligation) to purchase land from the landowner with a certain time frame. It is a binding agreement entered into between the parties and is often used by developers to secure the property whilst they explore the planning potential of the subject land.

There is usually an option fee paid by the developer to the landowner. This is often as little as £1. The purchase price for the property may be agreed between the parties at the outset of the option. Alternatively, a mechanism for calculating the final price may be inserted into the document.

Developer’s security

The option agreement prohibits the landowner from selling the property to a third party during the option period whilst the developer is exploring the viability of the project. Once the developer has satisfied himself as to the feasibility of the proposed development, he can trigger the purchase of the property by ‘exercising’ the option. Once the option has been exercised, it becomes an agreement to purchase making it obligatory for the landowner to sell and the developer to purchase on the terms set out in the agreement.

On the other hand, if it turns out that the project is not suitable, then the developer can simply walk away and let the option lapse without any penalties or legal repercussions.

What is in it for the landowner?

An option is an ‘option’ to purchase the land and not an ‘obligation’. The downside for the landowner is that the developer may decide, well into the option period, that the proposed development is not viable and pull out of the deal. However, if drafted and agreed diligently, option agreements can be a practical method by which landowners can offer up their land for development and reap the rewards of doing so, without having to be directly involved in either the planning process, or construction.

Are there other kinds of arrangements that may be more suitable?

Although an option agreement is one of the most common methods used to structure and secure a potential development in the UK, there may be other types of arrangements that could be more suited to give effect to the intentions of the parties, such as conditional contracts, promotion agreements, overage agreements, or pre-emption agreements. Every situation and eventuality require careful thought and professional advice to ensure that the documentation is suitable for the intended purpose.

If you would like more information about option agreements or any other matters concerning commercial property, please contact Matthew Morris-Ashton, who is a solicitor working as part of the Commercial Property Team at Phillips. You can contact him by emailing [email protected] or by calling 01256 854602.

Alternatively click here to go to our contact page.

 

 

Disclaimer

This article is current at the date of publication set out above and is for reference purposes only. It does not constitute legal advice and should not be relied on as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.

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