Solicitors Specialising in Property Option Contracts
What is a Land Option Agreement?
A land option agreement is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to buy a piece of land at a set price within a specific time frame.
The buyer pays the seller a fee, known as an option fee, to secure the right to purchase the land at a future date.
The option fee will be credited towards the purchase price if the buyer chooses to go ahead with the purchase. If a buyer decides not to buy the land, they lose their option fee.
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Land Option Agreement – What are the Pros and Cons?
With the purchase of land, there are several benefits to using these kind of contracts, including:
- Flexibility
- Security
- Lower risk
- Protection for the developer
- Security for the seller
Flexibility
The buyer has the right, but not the obligation, to buy the land. They can back out if they change their mind giving maximum flexibility for the minimum cost.
Security
The option fee gives the buyer a stake in the land and can prevent the seller from selling to someone else during the option period. Note that these type of agreements are only enforceable once both parties have agreed to the terms and the option fee is paid to the seller.
Reduced Risk
The buyer can secure the land without committing to a complete purchase, allowing time to explore opportunities and ensure it fits their needs.
Protection for the Developer
As a developer, you can use these kind of contracts to protect yourself from potential market changes or alternative land plans.
By securing the option agreement to purchase the land, the developer can ensure that it will be available to them when they’re ready to gain planning and start construction. This can provide peace of mind and help minimise potential delays or costs associated with finding new land.
Security for the Seller
Land option agreements also provide security and a guaranteed sale price for the seller. This is unlike a traditional sale, where the sale price may be subject to negotiation or changes in market conditions. The option agreement sets the sale price in advance, helping the seller plan their financial future with more certainty and minimise the risk of a downturn in the market.
Additionally, the option fee paid by the developer can provide the seller with a source of income during the option period—an especially beneficial incentive for sellers holding onto the land for investment purposes.
However, there are also some drawbacks to using a land option agreement, including:
- Cost
- Time constraint
- Competition
- Cost of Due Diligence
- Cost – The option fee is not refundable, so the buyer may lose money if they decide not to purchase the land.
Time Constraint
The buyer must decide within the specified time or negotiate an extension, or they will lose their option to purchase the land.
Competition
Other buyers may also be interested in the land. The seller may receive multiple offers, making it more difficult for the original buyer to secure the land.
Cost of Due Diligence
The buyer may incur additional costs for due diligence, such as surveys and environmental assessments, which they may not recover if the sale doesn’t go through.
Potential for disputes
Disputes between the buyer and the seller over land option agreements are mainly because the terms and conditions need to be clarified. And don’t cut corners. Make sure that you always get legal advice from a specialist property solicitor with plenty of experience of the land option – it’s a legally complex document.
What are Overage Agreements?
Overage agreements, also known as clawback agreements, can be included in a land option agreement and allows the seller to receive a portion of any future increase in the value of the land once developed.
An overage agreement can be a valuable tool for both the buyer and the seller. Using an overage agreement can help reduce a developer’s costs on the front end of a deal by lowering the cost of the land option agreement. In exchange, the seller would receive an agreed additional payment at the end of the development.
However, it’s essential to carefully consider the terms of the overage agreement, as it can impact the potential return on investment for the buyer.
Can You Sell a Land Option?
Yes, a buyer can sell their option to another buyer if they no longer wish to purchase the land. This is known as assigning the option.
The new buyer must agree to the terms of the original option agreement and negotiate a fee with the original buyer.
Can a Seller Back Out of a Land Option Agreement?
No, once an option contract has been signed, the seller can only back out if the buyer breaches the terms of that contract.
However, should the buyer fail to exercise their option within the specified time frame, they lose the right to purchase the land.
Are Property Lease Options different?
Yes, the property lease option (or PLO) is different. And the difference is relatively simple – while the buyer still has an option to purchase the land or property in future, in the meantime they take on some form of rental contract – allowing them to lease the land or property and gain the income in the meantime, regardless of whether they finally decide to go ahead with the purchase.
Click here to find out more about purchase lease options
Conclusion
A land option agreement can be useful for a buyer who wants to secure land without committing to the full purchase price.
These contracts can provide protection and security for both the developer and the seller, as well as the potential for additional benefits through the inclusion of an overage agreement.
It is essential to carefully consider the pros and cons before entering these kind of agreements and fully understand the terms and conditions. As with any legal document, always seek the advice of a specialist property lawyer.
FAQ’s
What is the difference between an option and a purchase agreement?
The main difference between an option and a purchase agreement is that if a potential buyer signs an option agreement, they are not legally bound to complete the purchase. When a purchase agreement is signed, the buyer must usually complete on a specified date. They have to do this or they will be in breach of the contract and could face a legal claim.
Another difference between an option and a purchase agreement is that an option agreement can sometimes be assigned or sold to another potential buyer, provided the agreement allows this. A purchase agreement is not commonly assigned and it is only possible to do so if the contract terms permit it.
There is also a difference between an option and a conditional purchase agreement. A conditional purchase agreement is generally less flexible for the buyer as they will be required to complete the purchase if certain conditions are met, for example, if planning permission is granted.
What are the disadvantages of an option agreement?
Potential disadvantages of an option agreement are:
• The price can be lower than might otherwise be achieved to take into account the work that the developer needs to carry out in obtaining planning consent and the risk that the local authority will not grant this
• Option periods can last for many years and the landowner will be unable to sell the land during the option period, which could cause difficulties if they need the funds
• By the time the buyer exercises the option, the value of the land may have increased substantially, but the price paid will not necessarily reflect this
• If the agreement does not specify a fixed price, disputes can arise when the option is exercised if the parties cannot agree on the amount the buyer will pay
• There is no guarantee that the potential buyer will purchase the property
• If a developer fails to secure planning consent within the option period, they will lose the initial premium and the chance to buy the land if they do not go ahead
• If the developer secures planning consent but fails to complete the purchase for any reason, they will have lost the value of the planning consent and the work carried out to obtain it
Are option agreements legally binding?
Option agreements are legally binding, provided that they are correctly drafted and executed. All contracts for the sale of land must be in writing and cannot be verbal.
It is important to have an option agreement prepared by an experienced option agreements solicitor. You should take legal advice before signing to ensure you understand the implications and that the agreement is in your best interests.
Is an option to purchase enforceable?
If an option to purchase has been carefully drafted, it will be enforceable by either party if the other party defaults.
If a dispute arises, solicitors for each party will usually negotiate to try and find a solution. If this fails the court can be asked to decide matters. It may enforce the agreement or award damages if one party has sustained losses because the other party has breached the contract terms.
