Option Agreements: what are they and how can they assist developers?

Obtaining planning permission for a potential development can be a lengthy and costly process. As a developer you want to ensure that the development site is not sold whilst you are dealing with the planning process.However, you do not want to tie up all of your capital and purchase a property in haste which could potentially prove to be unsuitable for development purposes. Our Commercial Property Department explain how an Option Agreement could help you.

What is an Option Agreement?

An Option Agreement is a contract between two parties; the landowner and a second party who has an interest in purchasing the land in the future. Most commonly, this would be a developer.

At the time of entering into the Option Agreement the developer would make a payment of an agreed sum to the landowner. This sum is generally non-refundable. In return the landowner would agree to reserve the land for a sale to the developer for a set period of time or by a specific date. The result is that the developer is granted a legally binding option to purchase the land by the landowner.

This legal interest in the land would usually be registered at the Land Registry to protect the developer’s right in the land.

Types of Option Agreements

The two main types of option agreements are:

• Call option – this is where the developer has the right, but not an obligation, to buy the land from the landowner; and
• Put option – this is where the landowner has a right, but not an obligation, to sell the land to the developer.

These can be merged into a Put and Call option where both parties have a right to require the other to either sell or buy (as appropriate).

Advantages of an Option Agreement

The main advantage to a developer is that it provides certainty during the Option Period that no one else can purchase the potential development site, allowing time for the developer to arrange project finances, submit a pre-planning application and take other steps necessary to assess the feasibility of the development.

If planning permission is refused, depending on the type of Option Agreement, the developer would not be obliged to exercise the Option and purchase the land. Whilst the initial payment made under the Option Agreement would be lost, the developer would not be left owning a piece of land which is unsuitable for development.

Disadvantages for the DeveloperWhilst the land is secured there is no guarantee that planning permission can be obtained to make the project viable. The developer may end up losing the Option Fee and professional fees for no return. Furthermore, care must be taken in fixing the price under the Option as the developer does not want to commit themselves to purchase the land at too higher price

Advantages for the Landowner

An Option Agreement provides a commitment to the landowner that there will be a sale in the future. In times of property market suppression, such as with the effect of Brexit and the surrounding political uncertainty causing a fall in activity in both the commercial and residential markets, having an interested developer provides an element of security for a landowner.

In the event that the developer does not exercise the Option, the payment made in consideration of entering into the Option Agreement is usually non-refundable in any event.

More information

If you would like to find out more information on Option Agreements and Overage Agreements, please contact a member of our Commercial Property Team.

This article was written by Gemma Ball, Solicitor in the Commercial Property Team at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of January 2020.