The Pros and Cons of Option Agreements

This month, we discuss Option Agreements and consider some of the advantages and pitfalls of this process of selling land for development.

Option agreements are a legal contract between a landowner and a potential purchaser or developer where the purchaser has the opportunity to purchase the site from the landowner at an agreed price within a set timeframe, as long as the terms within the option have been met.

An option agreement gives the landowner the peace of mind of a developer promoting their land for development and the developer is given some security over pipeline delivery for properties in the future. The price for the developer is typically discounted in return for the risks associated with an option prior to planning being achieved. The terms of the option usually tend to relate to planning. The time-lag in the option considers the developer managing the landowner’s land through the planning process for the various permissions required.

Once the planning permission process reaches an agreeable outcome, a Price Notice is served to the landowner, triggering the price negotiation process and the agreement of sale through an Exercise Notice.

A discount to the market value is typically levied upon the land price to take into account the time and risks involved with the planning process, in addition to a deduction for the initial option fee and the planning promotion costs. As the process does not involve competing bidders for the land on the open market, agreeing a price often involves lengthy negotiations.

The value of the completed development, costs involved in the development and the predicted profits of the project are all taken into account during the negotiation process to agree upon the market value of the site. Recent comparable land transactions, local market conditions and location are also of note.

From the outset, provisions for dispute resolution should be included in the Option Agreement. An independent expert or arbitrator should be appointed. This person must also be a Chartered Surveyor, agreed upon by both parties, or appointed directly by the RICS. They will consider written representations from both parties and decide upon a suitable price for the land.

It is vital that landowners are adamant that they wish to sell their land and that the proposed agreement meets their individual needs before signing. The agreement typically involves the developer giving a non-refundable sum to an owner, in return for the legally-binding option to buy the land within a set time period.

If you are considering Option Agreements or any other related issue, in the first instance, please email jdouglas@kingwest.co.uk or call our Market Harborough office on 01858 435970.