ARE YOU MANAGING YOUR RISK?
In contrast to simply buying land outright, a developer may wish to utilise an Option Agreement or Conditional Contract when purchasing land, writes Henry Prescott of Forbes solicitors
Options Agreements and Conditional Contracts are legally binding agreements that can be effective tools for developers to manage their risk.
Option Agreements allow buyers to purchase property dependent upon certain conditions being fulfilled.
This is a particularly useful tool for a buyer who may want to acquire a property that they want to develop but the property requires further exploration or investigation.
The procedure to obtain an Option Agreement can be summarised as follows:
1. The property owner and the buyer agree to enter into an Option Agreement.
2. The buyer will then pay the property owner a sum of money. This is called the option sum.
3. The property owner then agrees that the buyer has a right to buy the property during an agreed set period of time. This is called the option period.
4. If the buyer chooses to purchase the property during this option period it must notify the property owner. This is called the option notice. When providing the property owner with the option notice the buyer must also pay a deposit. At this moment a binding contract has been created.
If the buyer does not give the property owner an option notice during the option period then the property owner can sell the property to somebody else free of the option or subject to the same option.
The Option Agreement is an effective tool for any buyer or developer as it allows it to secure a property for a set period of time. If planning permission is rejected or is approved with unfavourable conditions the buyer can choose not to purchase the property. The procedure in the intial stages does not cost a lot of money and the Option Agreement is registerable at the Land Registry so that any new owner would be bound by the Option Agreement.
The Option Agreement is also of benefit to property owners that want to sell their property. The property owner can receive the option sum to secure the Option Agreement for the buyer. The option sum is to be negotiated with the buyer and depending on how much the buyer wants the property the option sum will, when properly negotiated, reflect the potential of the property to the buyer. The property owner will usually keep the option sum even after the option notice and eventual sale of the property. The Option Agreement is also useful to any property owner as it is a cost free way to utilise the buyer’s expertise in obtaining planning permission. If the buyer is developing a large site that includes other land the property owner can benefit further from the increase in value that this affords the property by being part of a larger development.
In a Conditional Contract the buyer agrees to purchase the property subject to conditions that must be met. When the conditions that have been agreed have been met the buyer is obliged to purchase the property. This differs from Option Agreements where the buyer can choose not to purchase the property even if the conditions they require are fulfilled.
The procedure to obtain a Conditional Contract may be summarised as follows:
1. The property owner and buyer enter into a contract for the sale and purchase which is conditional on certain conditions being met.
2. When these conditions have been met the agreement then becomes unconditional and the sale will continue on the terms set out in the contract for the sale and purchase.
3. If the conditions are not met by a set date the agreement will automatically come to an end or may be terminated by one or both parties.
With a Conditional Contract the buyer can secure the land for a set period of time to allow them to fulfill any conditions of the contract.
The Key Difference
The key difference between these two types of agreement is that under an option to purchase, a developer has the final say as to whether they will go ahead with buying the property, whereas under a Conditional Contract, a developer will be committed to complete a purchase once the conditions of the contract are satisfied.