Option agreements can be an intimidating prospect, but are there to protect both landowners and developers when purchasing land. Rebecca Emmitt, a solicitor in our Commercial Property team, explains what an option agreement is and what they're useful for. 

What is an option agreement? 

Option Agreements, also known as call options, are frequently used by developers to secure a right to buy land subject to obtaining suitable planning permission to develop it.  

This contractual arrangement enables a developer to secure the right to purchase land within a specified timeframe, with the developer having the option (choice) whether to buy it. The developer is not obliged to exercise the option.  

Why use an option agreement?

An option agreement prevents the landowner (seller) from disposing of the land to anyone else during the option period. This period serves as a “know the land” phase, providing the developer with the opportunity to conduct due diligence, consider the viability of the transaction, secure necessary planning permission and approvals, and allow them to make an informed decision on whether to exercise the option.  

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What should you consider when entering an option agreement?

For a developer entering into an option agreement, there are some key things to consider:

1. Timing: The defined option period is critical, providing the developer with a definitive timeframe to conduct their due diligence.
2. Price: Is there an agreed predetermined purchase price or has a pricing mechanism been agreed?
3. Option Extension Terms: Favourable terms for potential extensions to the option period should be negotiated.  This will afford the developer a degree of flexibility in navigating unexpected complications.
4. Conditions Precedent: Specific conditions that must be met before the developer exercises the option should be clearly identified, such as obtaining planning permission.
5. Land Use Restrictions: Are there any restrictions on the use of the land and will this affect the developers intended development plans?
6. Option Exercise Timing: The process and timing for exercising the option should be clear.

Careful consideration of these factors ensures that the option agreement reflects the developer’s objectives and aids in minimising any potential risks.

We can help you.

Option Agreements are very complex and bespoke documents. They require a considerable amount of negotiation between the parties and their legal teams. They need to be prepared in such a way to make certain there are no hidden effects. Suitable ‘anti-embarrassment’ clauses should be incorporated to ensure neither the seller nor the developer are embarrassed further down the road.

If you’re considering entering into an option agreement, it’s crucial you get expert help and advice. Our commercial property specialists, Victoria Evans, and Rebecca Emmitt, are on hand to guide you through the process. Call us today or make an enquiry.