Option Agreements
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In commercial property transactions, developers and landowners often explore creative arrangements to secure property deals. One of these tools is the option agreement. This is a mechanism that grants a prospective buyer the exclusive right to purchase a property from a landowner.
An option agreement begins with a prospective buyer and a landowner entering into a contractual arrangement. In exchange for the exclusive right to purchase the property, the buyer typically pays a sum known as an “option fee” to the owner of the property or land. Usually, the buyer and seller come up with a fair price which is often less than the market price and any other deductions such as the option fee and any planning permissions.
Crucially, the buyer is not obligated to buy the land or property there and then, instead, they have the flexibility to buy within a specified period outlined in the agreement (for example 7 years). If the option is not exercised during this period, it expires, and the landowner retains any option fee paid. During the option period, the buyer will be able to use the land or property and arrange any planning.
The duration of the option period is a key aspect, and it varies depending on the nature and scale of the potential development site or commercial property. An option period may span 1 to 3 years or 5 to 10 years, depending on the size of the investment and the terms decided. Extensions to the initial option period may be decided under certain circumstances, contingent upon the agreement, such as pending planning decisions.
Option agreements in commercial property transactions serve as a strategic tool, offering benefits for both developers and landowners. While they bring flexibility and exclusivity to the negotiation table, parties must carefully weigh the associated risks. We can help with this.
We understand that option agreements are not a traditional way to purchase property, therefore, it is vital that you have the right legal support in place.
We also offer clear and practical legal advice on a range of issues, including:
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When the developer or property owner decides to proceed with an option agreement, they typically serve an 'Option Notice' which acts as a binding contract for the sale and purchase of the site, with completion following the terms outlined in the agreement.
For developers, option agreements provide a crucial advantage, they restrict the landowner from selling to other parties during the option period. This exclusivity allows developers to explore project viability, pursue planning applications, and make informed decisions based on commercial appeal.
Option agreements are particularly attractive when assembling or expanding a development site, offering the flexibility to acquire neighbouring or adjoining land at a later date.
Landowners, recognising the development potential of their property, may lack the resources or expertise to pursue planning applications. An option agreement enables them to profit from the enhanced land value resulting from planning permission without undergoing the planning process themselves.
Developers may invest substantial time and resources in pursuing a planning application, only to find that the owner is unwilling to proceed within the option time.
For landowners, the restriction on property disposal during the agreement's term is a potential drawback, especially if the developer decides not to exercise the option.
Providing a reliable solicitor draws up the agreement, an option agreement is a legally binding contract between the property or land owner and the buyer.
