The ins and outs of Option Agreements

With half year end fast approaching our RP clients may wish to re-evaluate their own stock and pipeline projects. A lot of our RP clients have entered the strategic land market and have been entering into Option Agreements. Katie Fung, a Partner in our Real Estate and Project team, takes a closer look at the ins and outs of Option Agreements.

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), 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 however the right to exercise the option sits wholly with the developer.

The developer will take on the cost and risk of applying and obtaining planning in exchange for a discounted purchase price to reflect such risks. From a landowners 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 planning permission. Once planning has been secured the Option Agreement will set out the circumstances that must then be followed – a purchase price notice is normally served by the developer and the process of negotiating the purchase price will follow and then the purchase of the land by exercising the option.

The terms for ascertaining the purchase price will be set out carefully in the Option Agreement. As mentioned it would typically 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 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.

In limited scenarios it may be appropriate for the purchase price payable on completion 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.

Whilst it will largely depend on the parties negotiating position the Option Agreement should set out how much control each party should have during each stage of the promotion and planning process. 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.

One further point to bear in mind is any stamp duty land tax liability. This is especially true when the developer has the ability to extend the option period by payment of additional option fees.

If you need any advice or would like us to review the terms of any of your existing Option Agreements please do contact Katie Fung.

Alternatively, please feel free to contact another member of our Real Estate & Projects team: Aruna Sarwar, Caroline Mostowfi, Charlotte Sawyer, Dan Moan, David Bullock, Elad Yasdi, Hannah Langford, Jonathan Corris, Jonathan Jarvis, Neil Toner, Philip Evans, Stavrina Tofallis, or Triya Maicha.

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