A development property option agreement is a legally binding agreement between a potential purchaser (developer) and a landowner. However these agreements can also be used by community groups when looking to purchase community assets such as pubs and village halls. On the contrary not to develop but to retain within the community. When entering in to the agreement an ‘Option Fee’ (goodwill) is typically paid. The level of the fee will invariably be dependant on the circumstances and specific land/property. The option fee can be significant and may well correlate to development potential. However in circumstances where the proposal is more speculative the fee may be modest and/or no fee.
A property option agreement provides protection
The property option agreement grants a contractually binding first option to purchase. The purchase must take place within the option period (which can potentially last several years) or as a result of a trigger event, such as planning permission being granted for the development. An option agreement is registered with The Land Registry providing protection for the developer should the land owner attempt to sell the land to a third party. Option agreements can last anywhere between 12-18 months and upwards to 3-5 years depending on the complexity of the development. Options to extend would also be written in to the agreement usually subject to an additional fee paid to the seller.
An Option contract can cater for diverse development projects
Option agreements need not be restricted to residential development as they can also be used for alternative projects such as renewable energy projects. The property development option agreement may become protracted due to a number of factors. The development may well be in a sensitive area such as an AONB, Greenbelt and/or a city with world heritage status. However given that government housing targets have fallen well short local authorities have to look at options. We are now within the governments 2022 deadline and data confirms that barely 200,000 homes have been built. The government target was 300,000, therefore parts of the Greenbelt may well be released nearer to towns and cities.
Option agreements ideally with vacant possession strategy
The proposed development may have history and by researching local authority planning any local resistance can be confirmed. Will any continued local resistance further blight any prospective planning proposal. In 2021 local authorities received 474,100 planning applications, of those 7,800 were for office and commercial development schemes. What the landowner is able to do with the land during the option agreement is restricted. The developer/purchaser will want control and will be averse to the landowner granting leases or rights over the land. A vacant possession strategy will invariably be sought by the developer. This, therefore, restricts the landowner and the ability to realise income from the land or property (rental).
Spreading risk while raising profile
A Property option agreement should not be confused with a pre-emption agreement (first refusal). A property option agreement is a legally binding contract. Asides from landowners and farmers option agreements can be a real boon for community groups. Using the ‘Community Right to Bid’ land and buildings can be nominated as an asset of community value. A property option agreement is a 2 way street and provides the landowner with access to the skills and resources of a property developer. The developer may not take the option if the market dips and/or the local authority imposes onerous restrictions. In this case the landowner would have raised the profile along with future interest in their land or plot.
An Option agreement buys time
A non-refundable deposit may be negotiable at the commencement of the option but this is not always the case. This should not be a deal breaker as it will depend on circumstances. If the developer is successful in getting planning permission for the land but does not proceed with the option to purchase, the seller will still be left with land that holds the benefit of planning permission, as well as being in receipt of the deposit. A property option agreement buys time to obtain planning, qualify agreements from interested parties, to determine feasibility and to confirm available finance. An option agreement also offers the benefit of flexibility in exercising the option at any point within the given duration.
Always seek Professional advice
Importantly a property option agreement is a way for landowners to an increase in value without the associated costs or risks. Asides from the content herein there are a number of matters that need to be thought through with great care and attention to detail. Any or all concerns need to be aired and pre-empted prior to drafting. Any development project, irrespective of what stage, can be unpredictable. An accurately drafted property option agreement will offer security to both the developer and landowner. A well executed and drafted option agreement is vital given trigger events such as achieving planning permission.
Option agreement pitfalls considered
Some pitfalls herewith that you need to be aware of. Development projects coupled with local authority planning departments can become protracted, how does this affect you? If the process runs on would additional payments be in order? The developer’s timeline should be inclusive within the option agreement. This then ensures both parties have transparency moving forward.
Valuation:
How is the purchase price being arrived at and have any deductions found their way in to the agreement. Are certain parts of the land being labelled as of no use yet they may be strategically important such as access. The seller needs to be protected over the detail of minimum sale price and minimum land (acreage) take up.
Tranche Development:
A developer may wish to purchase the land in stages. Therefore a right must be retained to use any or all land while planning permission is being deliberated. The ongoing purchase of a tranche development affects receipt of proceeds and needs clarity within the contract.
Third Party Interests:
Third party interests need to be qualified prior to commencement of an option contract. Access to services need to be considered such as water, gas and sewerage. Approach your mortgagee as they will have to be notified at some point and are any Wayleave agreements in place.
Overage agreement (Increase in value):
If new or revised planning permission is obtained what will you receive in relation to the increased value. If the land increases once purchased what’s your percentage of the increase?
Discontinuance:
If the developer does not adhere to, or comply with the terms of the contract can you walk away and/or extricate yourself from the agreement. Provisions need to be clear on how you can walk away from the agreement. An exercise to delay or suspend the option should be considered to protect your position.
Even if your circumstances have changed you will have to honour the option and sell, all bases should be covered and securing the services of a specialist law firm is of paramount importance. Accountants should also be involved at an early stage to advise on tax implications and liabilities. Should there be adverse changes to the tax regime you need to be protected.
This post is for informational and reference purposes only and should not be construed as legal or investment advice. As with all contractual agreements seek legal advice/counsel prior to entering in to any property development option agreement.