What is an option agreement?
An option agreement is a contract between a prospective buyer and a landowner that grants an interested buyer the right (option) to purchase the land or property at a defined price within a defined period of time, often in exchange for an option fee. Most importantly, the ‘buyer’ is usually not obligated to purchase the property and can walk away at any time, but the owner is bound for the entire period.
An option agreement can be a useful tool for developers who are looking to acquire land for future development, as it allows them to secure the right to purchase the property without committing to the purchase. This can be particularly helpful where the developer needs more time to evaluate the potential of the site or secure planning permission, or where they need to assemble multiple sites for development over time.
Length of option periods vary but are usually no shorter than 6 months as this is the minimum time in which planning can (optimistically) be expected. On larger or more complicated sites, options can extend to several years. To ‘exercise’ (contractually commit and confirm they will buy the property) the option, the developer typically serves an “Option Notice” and pays a deposit, which creates a binding contract for the sale and purchase of the property. Deposits can vary but are typically between 5% and 10% of the purchase price. The date of actual completion (when the buyer pays the purchase price, and the seller transfers the property) also varies but is usually a few weeks to months to allow the buyer to organise their finances. The period between the buyer exercising the option to purchase and actual completion is predetermined in the option contract.
What are the potential benefits and risks?
An option agreement can benefit both parties, as it allows a developer to explore the viability of a project without being committed to purchase the land, while providing the landowner with the potential to profit from the enhanced value of their land without having to pursue the planning process themselves.
However, there are also potential risks associated with option agreements. For developers, there is the risk that they will invest significant time and money into pursuing planning permission, only to ultimately decide not to exercise their option to purchase the property. This could result in significant losses for the developer.
Whilst the option agreement remains in force, the landowner is prohibited from selling their property to anyone else. There is also no assurance that the developer will exercise the option and buy the property meaning that the landowner may have to start the sale process from scratch.
It’s important to carefully consider these risks and other factors when deciding whether to enter into an option agreement. Working with legal professionals who are experienced in commercial property and option agreements, like those at Lewis Denley Solicitors, can help ensure that the agreement is structured in a way that minimises risks and maximises potential benefits.