Property option agreements explained

Property options are a popular and versatile legal mechanism used in real estate transactions. They allow one party (the option holder) the exclusive right to purchase a property at a predetermined price within a specified timeframe, without being obligated to do so. Property options are commonly used in various scenarios, including land development, investment, and agricultural settings.

When are property options suitable?

Property options are typically used in situations where a party wants to secure the right to purchase a property in the future without committing to an immediate purchase. Common scenarios include:

• Development Projects - developers often use property options to secure land for future development while minimising upfront costs and exposure.

• Investment Planning - investors might use options to control a property’s future purchase without the need for immediate capital outlay, especially in fluctuating property markets.

• Agricultural and Rural Land Transactions - options are frequently used in agricultural settings, where landowners may wish to maintain their land’s agricultural status while offering an option for future sale to developers or investors.

• Contingent Purchases - when the sale is contingent on the approval of planning permission, a developer might use an option to ensure they have exclusive rights to purchase if the project progresses.

Types of Property Options

There are several common types of property option agreements used in the UK, each suitable for different circumstances :-

• Simple Option Agreement - straightforward agreement granting the holder the right to purchase a specific property at an agreed price during a fixed period. The option holder is not obliged to buy the property but is required to pay an option fee for the right.

• Conditional Option Agreement - dependent upon certain conditions being met, such as securing planning permission or completing other necessary approvals. If the condition is not met, the option holder has no obligation to proceed with the purchase.

• Overriding Option Agreement - allows the holder to exercise the option regardless of any existing agreements or rights associated with the property. This is commonly used in development agreements where a developer wishes to secure land despite other parties holding rights over the property.

• Call Option Agreement - holder has the right to compel the seller to sell the property to them under the terms of the agreement. This contrasts with a put option, where the seller has the right to compel the holder to buy.

What will the buyer want included in option agreement?

Key issues from the buyer perspective will include :-

• Price Certainty - clear price calculation mechanism with caps on any increase provisions, protection against excessive increase during option period.

• Planning - sufficient time to obtain planning permission, seller co-operation obligations, ability to extend period if planning delayed.

• Property Access - full rights to enter for surveys, planning-related activities and investigations.

• Deposit Protection - circumstances when deposit refundable clearly stated, protection mechanisms for larger deposits.

• Conditionality - clear conditions for option exercise, including minimum planning permission requirements.

• Assignment - rights to assign (transfer) option to group companies or development vehicles.

• Exclusivity - preventing seller from marketing or negotiating with others during option period.

Potential risks and benefits for option holder

• Flexibility - holder has the flexibility to decide whether to exercise the option, depending on market conditions, planning approvals, and other factors.

• Locking in Purchase Price - provides certainty, allowing the holder to secure a property at a known price even if the market value increases.

• Minimal Initial Investment - control the property without committing a significant amount of capital upfront, which is particularly useful for developers or investors with limited immediate funds.

• Time to Secure Financing or planning - reducing financial pressure and risks.

• Option Fee Loss - if the option holder does not exercise the option within the agreed period, the option fee is usually non-refundable.

What will seller want included in an option agreement?

From a seller perspective options should not be given lightly and there is often a lot to negotiate and include in an option agreement such as :-

• Option Period - strict timeframes for exercise, with clear start/end dates and any extension provisions requiring additional payment

• Payment Terms - substantial non-refundable option fee upfront, clear deposit requirements on exercise, and payment timing

• Planning Conditions - obligations on buyer to pursue planning promptly, seller approval rights over applications, and information sharing requirements

• Property Protection - restrictions on buyer's activities during investigations, repair obligations, and indemnities for damage

• Termination Rights - clear triggers for seller to end agreement if buyer defaults or breaches conditions.

Key Terms of a Property Option Agreement

A well-drafted property option agreement will include :-

• Option Fee - typically non-refundable but may be deducted from the purchase price if the option is exercised.

• Option Period - usually ranging from 6 months to several years, depending on the needs of the parties.

• Exercise Date - timeframe in which the option holder can choose to exercise the option and purchase the property.

• Purchase Price: - may be fixed or determined based on a formula (e.g., market value at the time of exercise) or an independent valuation.

• Conditions Precedent - conditions that must be met before the option can be exercised. Common conditions include obtaining planning permission or securing financing.

• Exclusivity - the right of the option holder to be the sole party able to purchase the property during the option period, prohibiting the grantor from negotiating with other potential buyers.

• Termination Clause - specifies under what conditions the agreement may be terminated and whether the option holder is entitled to a refund of the option fee if the agreement is cancelled.

• Notice Requirements - procedure by which the option holder must notify the grantor if they intend to exercise the option.

We can help

Please contact us is you are considering a property transaction which may involve an option, whether as buyer or seller. Property law is a core area of expertise and we have some very experienced lawyers who will protect your interests and save you time and money.