Option agreements: why landowners should consider their options

Coodes Solicitors Partner and Head of Commercial Property Jo Morgan explains what an option agreement is and what landowners should be aware of when offered one by a developer.

With the current push from the Government to build more new homes, landowners are frequently being approached by developers and third parties who are interested in acquiring all, or part, of their land. This can be a substantial acreage or just part of a garden or residential home. Either way, land is often one of your biggest assets and it is important that you get the best possible deal for any sale you may agree.

Approaches may be in the direct form of an offer for purchase of land by housebuilders, but often developers will propose an option to purchase.

What is an option agreement?

An option agreement can take different forms and, therefore, the complexities can vary. The most common is a call option, where a developer acquires a right to require the sale of a parcel of land for the period of the agreement. The key terms of this option, including the acquisition price, are negotiated at the outset, therefore, getting advice at an early stage is crucial. While the eventual purchase price is a heady draw, it is always important to bear in mind other terms of a future sale and to consider that most options may never be exercised.

The general purpose of the option is for the developer to secure an interest and control over land without actually buying it. This is a critical element as the developer can gain an interest in the land, which then gives him confidence to make other decisions. This may be obtaining planning permission for the site, with the assurance that they can exercise their option to purchase later. Generally, the developer will intend to obtain planning, which may be for a wider area than the land owned.

Usually, a specific clause will be included in the option, so the developer can apply for planning without objection from the landowner. This is an important point to discuss ahead of agreeing to the option, especially where the landowners retains an interest in adjoining land.

Options can affect the whole or just part of a parcel of land. The landowner would need to consider their position to make sure the option reflects their intentions and desires. If it concerns a substantial area of land, staging can be considered, and the impact on any land remaining, should be deliberated by the landowner. Forethought must be given to the future impact on any nearby or adjoining land retained by the landowner.

How can an option benefit a landowner?

Aside from the obvious possibility of future sale proceeds, as the landowner often has no guarantee that the option will be exercised, it is usual for there to be an option premium agreed between all parties. This is a sum of money, often non-returnable, that is paid to the landowner on the grant of the option.

If you are approached by a developer offering you an option for your land and you are interested in the proposal, it is important that you seek advice at the earliest opportunity. We recommend that you seek advice from a surveyor to get a valuation of the land alongside discussing key terms. As many developers produce a legal document immediately for review, it is also crucial that you get legal advice on the terms laid out in the option, to ensure there are no adverse provisions and that all terms required are included. Quite often, it is the missing clauses and provisions that can be the most problematic.

Land is likely to be one of the biggest assets that you will ever own, and it is important that you get the best deal for you, now and in the future.

For information or advice, please contact Jo Morgan at Coodes Solicitors’ Commercial Property team on jo.morgan@coodes.co.uk or 01726 874700.