A landowner and a developer can enter into an option agreement, which grants the developer the chance (without any obligation) to purchase the land within a specified timeframe. This agreement, a legally binding contract, is commonly utilised by developers to secure the property while they assess its potential for planning purposes.
During the option period, the developer typically pays a fee to the landowner, often a nominal amount like £1. The purchase price for the property can be predetermined by the parties involved, or the agreement may include a method for calculating the final price.
Safeguarding the developer’s interests, the option agreement prohibits the landowner from selling the property to a third party while the developer explores the project’s viability. Once the developer is confident about the feasibility of the proposed development, they can exercise the option, thereby initiating the purchase of the property. At this point, the option becomes a binding purchase agreement, obliging the landowner to sell and the developer to purchase the property based on the terms specified in the agreement.
However, if it turns out that the project is unsuitable, the developer can simply abandon the option without facing any penalties or legal consequences.
What benefits does the landowner gain from this arrangement?
The landowner is offered an “option” to sell the land, rather than being obligated to do so. The drawback is that the developer may withdraw from the deal at a later stage during the option period if they deem the proposed development unviable. Nonetheless, when carefully drafted and agreed upon, option agreements can provide landowners with a practical means to offer their land for development and reap the benefits, all without direct involvement in the planning process or construction.
Are there alternative arrangements that may be more suitable?
While an option agreement is a commonly used method in the UK for structuring and securing potential developments, there may be other types of arrangements better suited to fulfil the parties’ intentions. These could include conditional contracts, promotion agreements, overage agreements, or pre-emption agreements. Each situation and circumstance require thoughtful consideration and professional guidance to ensure that the documentation is appropriate for its intended purpose.
If you are a landowner or developer, we can offer advice and guidance on the most suitable mechanisms and agreements to facilitate your development. Don’t hesitate to reach out to our Commercial Property team for further information, email firstname.lastname@example.org