Keeping options open? What are the benefits of Option Agreements?

There are simply not enough houses in Britain. That is the message taken by many following a recent review of the levels of affordable housing. To encourage an increased supply, the Government proposes to streamline the planning application process for housing developers. Land is already at a premium and this will mean developers will be clamouring to get their hands on it. 

If a developer has expressed an interest in developing your land, you can take advantage of their resource and experience in obtaining planning permission and in turn benefit from any future increases in land value. However, the same experience puts the developer in a strong bargaining position, often at the detriment of the landowner. It is therefore crucial that any agreement is put in writing and properly drafted by a solicitor.

Option Agreements are a great way of reducing the risk posed to a landowner in such circumstances. In brief, an Option Agreement is a contract giving the developer a legally binding option to purchase the land either on a certain date; within a specified timescale or on an occurrence of an event (such as the granting of planning permission). The Option Agreement will restrict the use of the land until the Agreement expires, in exchange for which the landowner will receive a non-refundable deposit. The Agreement can ensure that the purchase price will reflect any uplift in value during the intervening period. There can be lots of pitfalls and Option Agreements are notoriously complex so require meticulous drafting.   

There are generally four types of Option Agreement:

  1. Put Option
  2. Call Option
  3. Cross Option
  4. Reverse Option

Each type of Option determines the structure of the transaction, the obligations of the parties and the triggers for purchasing the land.

From the developer’s perspective, not only does an Option Agreement allow the developer time to negotiate an acceptable planning permission and other consents but it also alleviates any investment risk enabling the developer to assess the prevailing market conditions. Given the current housing market uncertainty perhaps as a result of the triggering of Article 50 and ongoing Brexit negotiations, it is likely that there will be an increase in the number of Option Agreements sought to allow developers to obtain a clearer picture of the market.

For more information and advice, please contact our Commercial Property team on 0113 201 4900 or email commercial.property@emsleys.co.uk.

Back to Blog