The ongoing housing shortage, and government relaxation of planning rules in an attempt to encourage building, is resulting in more landowners being approached by developers / house builders offering to promote land for residential and /or commercial development. Option Agreements are a popular way of structuring an offer or potential development between parties. Frances Watts explains…
Option Agreements
We are seeing an influx of landowners being approached by developers who offer to try and obtain planning permission for development of their land in return for the right to purchase the land at a once they have obtained planning permission.
This arrangement would be formalised in an Option Agreement which is a binding contract between a landowner and a developer where the developer has the opportunity to purchase land from the landowner within an agreed time frame. Option Agreements are often used by developers wishing to secure the right to buy land once they have obtained planning permission.
Before an Option Agreement is entered into, most developers will wish to conduct pre-contract enquiries into the land to determine if there are any restrictions or other matters which will prevent or interfere with the intended proposals to develop the land.
The advantage of an Option Agreement for the landowner is that the developer will apply for the grant of planning permission at their own cost and risk. Any legal costs the landowner may incur are usually met by the developer. This allows landowners to propose their land for development without having to go through the costly process of obtaining planning permission themselves. Landowners can also take advantage of the experience and skills of the developers when it comes to obtaining planning permission, potentially increasing the chances of the development going ahead.
Conversely, the risk to the landowner of entering an Option Agreement is that it does not guarantee a sale at the end of the option period. As they will be entering into an agreement for a number of years, this will restrict the landowner from selling the property to any other interested party without the guarantee of a sale at the end of the option period.
There are no standard commercial terms for an option, and this will be dependent upon a number of factors. Both parties should take professional advice on the terms from a land agent or surveyor.
Once the developer is satisfied with the feasibility of the proposed development, they can trigger the purchase of the property by exercising the option, making it obligatory for the landowner to sell to them on the terms set out in the agreement. Note, whilst the developer can choose to exercise their option to purchase the land, there is no actual obligation on them to proceed with the purchase.
If the parties agree a conditional contract, a developer will be compelled to purchase the property once planning permission is granted, which can give a landowner greater comfort that a developer will proceed.
Overage Agreement
Once the land has been developed, it will have an increased market value – so landowners may also want to think about methods by which they may share in the developer’s profits or uplift in the value of their land even after they have parted ways, known as Overage Agreements. For an Overage Agreement to be effective, the correct legal framework will need to be put in place and there are many considerations that will need to be negotiated.
How We Can Help
THP have advised on numerous development and regeneration transactions, assisting landowners and land promoters looking to realise the value of their estate, and commercial property investors looking to invest capital. There has been a definite increase in clients taking options or entering into conditional contracts to acquire land for development. Option Agreements can offer significant opportunities to both developers and landowners alike, but careful drafting is required to avoid potential pitfalls.
Whether you are a landowner seeking to maximise the value of your land, or a developer looking to explore the viability of a project before committing to buy the land, the experienced Commercial Property team at THP Solicitors can assist with all aspects of Option Agreements, as well as other contract options. We offer a tailored legal service for all sizes and types of real estate transaction, from large mixed-use schemes to small bespoke residential or industrial developments.
For more information please contact Frances Watts in our Commercial Property team on E: frances@thpsolicitors.co.uk or T: 0118 920 9499.