What is an option agreement?
An option agreement is a contract between a seller of property or land and a potential buyer. This type of agreement gives a buyer an option to purchase land at a later date.
A buyer does not have to exercise their option to buy the land, but a seller is usually tied to the sale.
Securing an option agreement gives a buyer time to secure planning permission, carry out any research needed, or raise funds without worrying that another buyer will purchase the land in the meantime.
What are conditional contracts?
Unlike option agreements, conditional contracts are legally binding to both the seller and the buyer. Both parties must go ahead with the transaction if certain conditions are satisfied.
For example, if the purchase is conditional on the buyer obtaining planning permission, then the buyer must purchase the land if planning permission is granted. If they had signed an option agreement instead of a conditional contract, they would have had the option to walk away.
What to consider when entering an option agreement
Before entering into an agreement there are a number of aspects to consider, including:
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Timescales and the period of the agreement
Agreements usually specify a deadline by which an option must be exercised by the buyer. It is important that enough time is allowed for the buyer to carry out the work that needs to be completed before they can purchase the land. It is advisable for both parties to agree on a timetable so they have clear and realistic expectations.
If an option is not exercised by the stated deadline then it will lapse, unless an extension is agreed between the parties.
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The extent of land and/or property included
The agreement must include a clear description and a plan of the land included in the option. If only part of a piece of land is being sold this must be clearly defined on a Land Registry compliant plan.
Our solicitors check title plans to make sure the boundaries marked on the plan match the physical boundaries of the land. The details of a plan are important because they affect the future value, and there may also be maintenance obligations to consider.
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The conditions determining when an option becomes exercisable
The most common condition that determines when an option is exercisable is the successful granting of planning permission. The buyer is usually responsible for securing planning permission.
Sometimes a condition falls to the seller. For example, if a piece of land or a property is currently occupied by a tenant the purchase may be conditional on vacant possession.
A buyer can normally exercise an option any time after an agreement is signed.
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Any deposit or option fee payable
Usually the buyer will pay the seller a fee when they sign an option agreement. Since the seller cannot sell the property to another buyer during the option period, the buyer is buying the exclusive right to purchase at a later date.
Sometimes this fee is a deposit which is deducted from the purchase price when land is sold.
Whether any fee is refundable and the size of the fee are points of negotiation.
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If extensions are possible and on what terms
Agreements can be extended if they contain a clause that permits an extension.
It is advisable to include an extension clause in an agreement if the timing of the event that will trigger the option is uncertain. This is the case most of the time because purchases generally depend on satisfactory search results and permissions being granted.
An extension will be for a fixed length of time. The extension clause will state this time period and the price the purchaser will pay for the extension. Both points can be negotiated by your solicitor.
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The final purchase price or formula
The purchase price of a piece of land may be fixed when an option agreement is signed, or it might be decided when the buyer exercises the option.
When a price is set in advance of purchase it may be calculated according to a formula.
If the price is calculated when the option is exercised, then it will be largely determined by the current market value.
An option agreement carries a risk to the seller if a price is fixed at the outset. If market value goes up, they will lose money on their land because they are legally bound to sell at the price stated in the option agreement. Since there is nobody else bidding for the land this could also affect the final price. The option fee is likely to reflect the seller’s risk.
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Termination clauses
Termination clauses give a seller the right to terminate an agreement if a buyer does not fulfil certain obligations. These obligations will be set out in the agreement. For instance, if a buyer serves notice to exercise an option but does not complete the purchase on a given date, the agreement will be terminated.
How we can help
Parkinson Wright commercial property solicitors can assist you with the following:
Drafting option agreements
When drafting agreements, we consider:
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The risks to you. What risks contained in the agreement can be eliminated or mitigated?
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The option fee or option deposit. How much is ‘the right to buy’? Is the amount fair?
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The likelihood of the option being exercised. For instance, how likely is it that planning permission will be granted?
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The period of the option agreement. By which date must the option be exercised before it will lapse? Is this realistic?
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The final purchase price of the land or property. Does it reflect the financial impact of entering into an agreement?
An option agreement needs to be thorough and detailed. A meticulously drafted agreement can save you time and money by ensuring there are no issues with option implementation or price.
Negotiating option agreements
Option agreements sometimes contain overage clauses. An overage clause gives the seller a right to additional payment if the value of land increases after it has been sold. For instance, land has a higher market value once a new house has been built on it.
Overage clauses have obvious benefits for sellers, but they can also benefit buyers. However, there are many potential pitfalls. Our commercial property solicitors can scrutinise overage clauses and make sure your interests are safeguarded.
Reviewing option agreements
Land or property might be subject to a restrictive covenant which could limit the way it can be used in future. For example, structural alterations to a property may be forbidden or land use might be restricted in some way.
An unwitting breach of a restrictive covenant can lead to expensive legal action. Our solicitors check with the Land Registry whether restrictive covenants are recorded and enforceable.
We carry out extensive pre-contract enquiries to make sure your plans for land or property are not limited. We also establish whether land is subject to VAT. If so, the option agreement should contain provisions for this.
Who we help
Parkinson Wright acts on behalf of landowners and developers.
Landowners
If you sell your land to a developer the value of your land may increase once it has been developed. Our solicitors can advise you about potential overage opportunities so you can benefit from any increase.
Legal advice is crucial when entering into an agreement with a developer. Our solicitors have the knowledge and experience to ensure your interests are protected. If the agreement spans 3-5 years, this may limit how you can use the land in the meantime. Additional payments may be negotiated from the developer to reflect the impact on your business.
Sometimes developers wish to purchase land in stages. When you receive payment and how you can use undeveloped land in the meantime should be clear in the option agreement.
Developers
Our solicitors can negotiate an option agreement to protect your interests. We will make sure restrictive covenants are not in place that will impact your project.
When reviewing option agreements, we make sure the price of the option reflects your financial risks.
Why choose Parkinson Wright solicitors?
Parkinson Wright commercial property solicitors draft and review option agreements on behalf of both buyers and sellers. We consider all foreseeable eventualities and make sure the terms included in the agreement are right for your circumstances.
Accreditations
Parkinson Wright commercial property solicitors have a number of accreditations, so you can rest assured you will receive expert legal advice and the highest level of customer service.
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Solicitors Regulation Authority
Regulated and authorised by the Solicitors Regulation Authority (SRA). -
Lexcel Quality Mark
We have achieved the Law Society’s Lexcel Legal Practice quality mark, which sets the standard for client care.
Get in touch
We offer a Free Initial Assessment, so you can call us without charge or obligation to discuss how we can assist you.
To arrange your Free Initial Assessment at a time convenient to you please call 01905 401 893.