Option Agreements for Land Development: What Landowners Need to Know

What Is an Option?

When selling land with development potential, you may be approached by a developer offering to enter into an option agreement for the purchase of your property. In some instances, the developer may offer a relatively high price for the land, which will become payable once satisfactory planning permission has been secured.

But What Is an Option?

Essentially, an option gives the purchaser or developer the right to purchase the property, but they are not obliged to do so. The decision to proceed with the purchase is at their option, subject to the terms agreed between the parties.

Why Have an Option?

For the developer, an option agreement provides flexibility to pursue planning permission without committing to purchasing the property if satisfactory planning permission cannot be obtained.

For a landowner, however, entering into an option agreement can have significant implications. It is therefore important to carefully consider the terms before entering into an agreement.

Issues to Consider When Discussing an Option Agreement

Option Fee – Developers are often reluctant to pay a significant option fee, as they will also incur costs when pursuing planning permission. However, the option fee should be considered carefully, as you may be unable to sell or otherwise deal with the property while the option is in place.
How Long Should the Option Last? Developers will generally want a sufficient period of time to obtain planning permission, but this can mean that your property is tied up for a considerable period. A developer may also request the ability to extend the option period if a planning application remains outstanding or is subject to an appeal. However, the agreement should not continue indefinitely. A clear long-stop date should therefore be agreed, after which the option will come to an end. This should be discussed at the outset of the transaction.
Costs – When obtaining planning permission, a developer may need to enter into agreements with the local council, highways authority or other third parties. As the landowner, you may also be required to enter into these agreements and should not do so without obtaining legal advice. You should therefore ensure that the option agreement clearly sets out who will be responsible for any legal and associated costs arising from these agreements.
Access – A developer will often require access to the land to carry out surveys, investigations and reports as part of the planning process or to satisfy planning requirements. This should be considered carefully, as access can potentially be disruptive. The option agreement should clearly set out the developer’s access rights and any relevant restrictions or obligations.
Consent – If you have a mortgage or other charge over the property, you should approach the lender or charge holder at an early stage to confirm whether they are prepared to consent to the option agreement being put in place. You should also provide your legal adviser with the details of any mortgage or charge holder as early as possible in the negotiations.

Conclusion

The above are just some of the issues that can arise when entering into an option agreement with a developer. The terms of these agreements can have significant implications for landowners, particularly where the property may be tied up for a considerable period.

It is therefore advisable to seek legal advice at an early stage to ensure your interests are protected and that all relevant issues are considered during negotiations with the developer.

When buying or selling commercial property, you need expert legal advice and support to ensure you are legally and financially protected. Our commercial team can assist you all the way through the process. Contact us on 01329 822 333

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