Strategic Land Series – Option Agreements

With strategic land becoming more competitive due to its cost effective nature in providing some security for future pipeline delivery, Katie Fung, a Partner in the Real Estate & Projects team at Devonshires, will discuss the key differences between various strategic land structures in this series. In the first part, Katie will discuss Option Agreements.

In general terms, strategic land is land which has significant potential to develop – the most common reason being its close proximity to key (whether existing or future) transport links, existing settlements or within an area that has a high demand for housing. Such land may or may not be allocated for residential development in the relevant local authority’s development plan but because of its location has the potential to achieve such allocation (or be allocated as a growth area under the Government’s proposed changed to the planning system) and planning permission to be granted in the medium or long term.

Option Agreements are a popular method of structuring a deal. Essentially, under an Option Agreement, the landowner grants the developer an option to purchase the land during the option period in return for a consideration. The developer would ordinarily use the option period to promote the land (if the land is not already allocated for development) and apply for and secure planning permission. The Option Agreement may or may not restrict the circumstances in which the developer can exercise their option. For example, the developer may only exercise their option after the grant of a planning permission but unlike a conditional contract, the right to exercise the option sits wholly with the developer. Caution should be taken in relation to any conditions that require a Landowner to undertake a certain action and/or produce a certain deliverable to minimise the risk of Landowner potentially frustrating the Developer’s ability to complete.

Under an Option Agreement, the developer will take on the cost and risk of applying for and obtaining planning in exchange for a discounted purchase price to reflect such risks. From a landowner’s point of view, they can take advantage of the experience and expertise that developers have when it comes to promoting the land through the planning process and securing a satisfactory planning permission. Once planning has been secured, the Option Agreement will set out the circumstances that must then be followed. There are a variety of different approaches in relation to the calculation of a price from pre-agreed fixed prices to calculations based upon percentages of land values and agreed deductions.

Typically if there is a price calculation to be undertaken – a purchase price notice is normally served by the developer; the process of negotiating the purchase price will follow; and the purchase of the land by exercising the option completes the process.

The terms for ascertaining the purchase price will be set out carefully in the Option Agreement. This could include a pre agreed percentage discount from the market value of the property at the time of service of the purchase price notice. Often it will also include additional deductions such as the planning promotion costs, any professional fees which may have been paid by the developer on the landowner’s behalf and the option fee.

As mentioned above it may be appropriate for the purchase price to be fixed at the time the Option Agreement is entered into. This would be suitable if the developer is confident planning permission can be secured imminently. However more often than not the parties will deal with this by incorporating a minimum land price within the price determination clause itself.

It is important that due consideration is given to potential dispute resolution approaches in relation to the calculation of the purchase price and the resolution of any pre-exercise conditions. The parties may wish to favour a swifter route to a third party resolution of the price by an independent surveyor or a blended approach considering an agreed number of valuations.

Whilst it will largely depend on the parties negotiation position, it is an important factor that the Option Agreement sets out how much control each party has during each stage of the promotion and planning process during the option period. As the developer will be incurring all planning costs at risk, not to mention the fact that they have the relevant expertise, they will argue they should not be restricted by having to obtain the landowner’s consent at various stages. Equally the landowner would want the developer to do everything they can to maximise the developable area within the land and thereby maximising the value of the land. The parties should therefore agree, at the outset, the objectives to which the developer agrees to be bound by.

For Registered Providers it is essential that any option agreement is within the correct group entity to ensure compliance with any regulatory and/or charitable considerations. Sufficient flexibility should be retained to allow the benefit of the Option Agreement to move to group companies or potential joint venture entities to ensure the correct delivery approach is adopted.

One further point to bear in mind is any stamp duty land tax liability. SDLT may be payable on both the grant of the option (this is especially true when the developer has the ability to extend the option period by payment of additional option fees) and the actual acquisition of the land itself.

Please do not hesitate to contact Katie Fung or another member of the Real Estate & Projects team, Jonathan Corris, Neil Toner, Hannah Langford, Triya Maicha or Elad Yasdi, with any queries.

Upcoming Webinar

Make sure to keep a look out for updates on our Strategic Land webinar, which we will be hosting in the coming months!

The webinar will feature a Q&A session where we will discuss the most commonly asked questions. So we can tailor our webinar, we ask you to submit your questions and comments to us on Strategic Land by clicking here.

To help keep this webinar of interest for all delegates, it would be helpful if questions can be kept as generic as possible. Whilst we will endeavour to answer and discuss a variety of questions during our webinar, please note we cannot guarantee that we will be able to respond to all of your questions.

For more information on the upcoming webinar please contact Katie Fung.

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