Are option agreements useful for developers?

Buying land with a view to development and/or change of use is a major commitment and it is understandable, especially if it is your first venture, that you have some reservations about an immediate purchase where it might not be possible to achieve development.

This is where understanding your alternatives is important for ensuring that you don’t make a hasty decision.

An option agreement can provide much-needed security, but only if you know how to obtain and negotiate one.

What is an option agreement?

An option agreement gives developers the exclusive right to buy land within a set time frame at a price.

The main advantage of an option agreement is that you are under no obligation to go ahead with the purchase if you decide that you do not want to buy the land after all.

If you do back out of the deal by not exercising the right to buy, the only cost to you is any fee that you paid to secure the agreement, as this cannot be refunded.

Why would a developer want an option agreement?

It’s not always completely obvious whether land will be suitable for what you have in mind.

At the same time, when you recognise the value of land, you don’t want someone else buying it before you are ready.

An option agreement gives you the time you need to fully test the feasibility of the land and the development potential you are seeking before you commit the significant resources required to purchase it.

This can also be a good opportunity to explore and secure financing options, if needed, so you can have a better understanding of your budget.

By securing a time window in an option agreement, you can take that time to submit a planning application for permission to do what you want with the land.

If your planning application is refused, you can walk away from the land and look for a better location.

How do I make an option agreement work?

The most important points to have in place for an option agreement are the duration of the exclusive right and the trigger for the right to buy.

With the duration of the exclusive right, you want to make sure you give yourself enough time to explore whether the land is right for your needs.

However, the current owner of the land will not want to give you too long, as they will be keen to sell the land.

This means that you need to be reasonable with the time scale you propose, ensuring that it is enough for you to have everything done but not beyond the realm of feasibility.

You also need to clearly define the trigger event for the right to buy.

Ideally, this will be linked to planning permission being granted so that everything is underway at the appropriate time.

This is a good way of making it clear that your purchase of the land is dependent on you being able to do what you actually want to do with it.

In that sense, the trigger event serves as a good way to ensure you are only set to buy the land if it is suitable for your needs.

When is an option agreement not a good choice?

Most commonly, the biggest problem is not giving yourself enough time in the option agreement to gain planning permission, especially when many applications go to appeal.

If your time elapses before you have everything sorted out, the agreement will end.

This is the case even in instances where you could be close to gaining planning permission.

Having spent money in endeavouring to obtain that permission only for it to be to no avail, can be disheartening.

Seeking advice early is a good way to ensure that your option agreement is right for you and that it is fit for purpose.

We can help you with each stage of the purchasing process so that you can act with confidence.

Get in touch with our team to find out more about managing option agreements.