Option Agreements And Considerations For Landowners

• Published date: 27 July 2023
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Herrington Carmichael
• Author: Tim Hardesty and Dil Vajaria

What is an option agreement?

An option agreement is where a prospective buyer, in this case the developer, enters into an agreement with a landowner for the right to buy their land. The developer then has the option (within a period defined in the agreement) to buy the land. It is important to note that the developer has the option to purchase the land and is not under an obligation to do so. The developer will usually pay a sum of money to the landowner for the right to exercise the option, known as an option fee.

Why is an option agreement used?

Option agreements are a popular choice for developers as the option period allows the developer to pursue a planning application for their desired project without the risk that they will be obliged to buy the land without the benefit of planning permission.

How can an option agreement be useful for both me as a landowner, and the developer?

An option agreement can be a great choice for both the landowner and developer.

An option agreement is beneficial to a developer because it enables them to explore the viability of a development project without being committed to purchasing the land. It also provides security to the developer as they can do so freely without the fear that the landowner will sell the land to another party.

An option agreement can provide a great deal of flexibility for the developer because if it transpires that the development project is unsuitable, the developer can simply walk away and let the option expire.

Option agreements can also be beneficial for landowners because they can realise a higher price for their land without having to be directly involved in the planning process and without needing to invest their own money for the same.

How is the option exercised?

The developer will usually be required to serve the landowner with an 'Option Notice' and pay a deposit at the point they wish to exercise the option to purchase the land. Serving the option notice creates a binding contract for the sale and purchase of the site, with completion to then take place in accordance with the terms of the agreement.

What other types of contracts are available, and what are they?

Conditional contracts are commonly used between developers and landowners. These are contracts which are conditional upon one or more things happening before the contract can proceed to completion.

In this context, the contract will usually be conditional upon the developer obtaining satisfactory planning permission to develop...