What is an option agreement?
An option agreement is a contract between the landowner and a potential purchaser / developer of the land or property, which grant the purchaser / developer an option to purchase the land / property at anytime during an agreed ‘option period’ in return for an ‘option fee’.
When is an option agreement used?
Option agreements are used where a purchaser / developer is interested in purchasing a property / land for residential and/or commercial development and it is common for the purchaser / developer to use the option period to apply for and secure any necessary planning permissions required to proceed with their development, in addition to any finance.
Are there any benefits of an option agreement?
Yes. There are many benefits for both the landowner and the purchaser/developer:
- A landowner can secure the final purchase price. If the value of the property decreases before the option agreement comes to an end, this will not affect the seller – the price agreed will remain (subject to the clauses stated in the agreement)
- The landowner can continue to use the property during the option period
- The purchaser/landowner is liable to pay the cost of obtaining any planning permission / surveyors during the option period
- A purchaser/developer can secure the final purchase price. It can be negotiated that the buyer pays the agreed purchase price, even if the value of the property increases during the option period
- A purchaser/developer has time to instruct surveyors / architects, apply for planning permission and / or raise finance during the option period
- An option agreement prevents the landowner from selling the land / property to anybody else during the option period
What are the risks?
Planning permission may not be granted to the purchaser / developer to develop the land. In this case, the purchaser / developer is unlikely to exercise their option to purchase the land / property within the option period, therefore a sale is not guaranteed at the end of the option period.
This is a risk for the seller as they will be entering into an agreement for a number of years, restricting the landowner from selling the property / land to any other potential purchaser / developer, without the guarantee of a sale at the end of the option period.
Careful consideration must be given when drafting and negotiating Option agreements. It is strongly recommended that any buyer or seller works with a trusted commercial property solicitor.
For further information, please contact Gemma Eastham, Commercial Property Solicitor at MBH Solicitors who will be pleased to assist you:
www.wigansolicitors.com Tel: 01942 206060 Address: 26 Bridgeman Terrace, Wigan WN1 1TD.