Option agreements are a two-edged sword that can be advantageous to either party. They are usually made between a landowner and a developer and allow the developer to try to secure planning consent for a piece of land prior to purchasing it. This may seem to be wholly in the developer’s favour as they can explore the viability of a development before committing to the cost of the purchase. And meanwhile, the vendor – the landowner – is not guaranteed a sale.
How do option agreements work
Typically, an option agreement lasts for two or more years during which the developer, at any time, may serve a notice – a call option – triggering the purchase process.
There is also another form of agreement whereby the landowner can give notice – a put option – to the developer triggering the purchase process once certain criteria have been met, but these are far rarer than call options in the current market.
The option agreement usually requires the developer to seek planning consent for a certain type of development. However, that is not the end of the process since obtaining the consent will not in itself trigger the sale and the developer remains free to withdraw from the transaction should it choose to do so.
This may all sound very one-sided, but there are some advantages for the landowner.
Some pluses for the landowner
The landowner is paid a sum of money when the option is entered into. This is to compensate for the land being tied up whilst the developer applies for planning and for the lack of certainty regarding a final sale. Whilst this initial payment is usually quite small, if the land in question is likely to yield a good return for the developer, then the landowner can expect a much higher sum of money.
In the event of the developer not purchasing the land, moreover, then the landowner will find that his or her asset has appreciated in value because it now has planning consent. The landowner is unlikely to be as experienced in planning matters as the developer and, while proceeding with caution, should benefit from the developer’s superior expertise.
Furthermore, the landowner will save time and money by not having to make the initial outlay in order to apply for planning consent or deal with the complexities of the planning process.
Where the development site is formed from several areas of land under different ownerships, the landowner will also benefit from the developer piecing together the various areas to create better value than the landowner may have obtained simply by obtaining planning consent for his or her parcel of land.
A final word of caution
A landowner contemplating an option agreement with a developer should seek both legal and valuation advice. This is to obtain not only the best price for the land, but also a fairly drafted agreement which does not leave them disadvantaged.
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