Lees Solicitors - Option Agreements - Mike Read

Commercial Property News

Option Agreements - Mike Read


Option Agreements - Mike Read

If you want to buy a property conditional upon the happening of a certain event or if you want to be guaranteed the opportunity to buy a property during a specified period of time or at some future date, then you may enter into what is known as an option agreement with the owner. Under such an agreement, you as the prospective buyer enter into a contract, which would normally involve the payment of a non refundable sum of money, in exchange for the legal and binding right to buy the property at, or within, some future fixed or ascertainable time period. Option agreements are widely used where a buyer wishes to purchase land only if an event, (usually the granting of planning permission) occurs.

Generally speaking if the option is subsequently exercised then the initial payment for the option will be credited against the eventual purchase price of the property when the matter is completed, but that is not always the case and such an arrangement will be a matter for negotiation between the parties at the outset.

The timing of a purchase under an option agreement can be influenced by a number of factors, so whilst options are usually for a specified fixed period it should always be remembered that the maximum period for which an option can legally be granted is 21 years. If the option is created for a longer (or indeterminate) period, then it will be unenforceable. This is so even if the option must be preceded and triggered by some event, such as the granting of planning permission. Also, to be enforceable an option for the sale of land must be registered at the Land Registry. In practise most option agreements are for relatively short periods of time within the range of one to five years. It will generally be the case that the longer the option period the greater will be the purchase price.

The option agreement may stipulate that the property is to be purchased at a fixed price or it may stipulate that the price will be at the market valuation when exercised, but from the buyers perspective the purchase of the option means that for a fixed and ascertainable period of time the property cannot be sold elsewhere. From the sellers point of view, particularly in a depressed market, there is the advantage of a payment up front in consideration of the grant of the option, and the knowledge at least that there is an interested buyer who may exercise the option and purchase the property at some fixed date in the future at a predetermined price.

In order to exercise the option to purchase the land, the prospective buyer must serve on the seller a valid notice within the specified time limit. If the option period is about to expire then it would be advisable to ensure that proof of delivery (time and/or date stamped as appropriate) is obtained. Time limits usually have to be strictly observed and if the seller would prefer not to have to sell to a buyer pursuant to the terms of an option agreement which may have been completed two or three years previously then that seller will be looking for any reason which may invalidate the option notice and a missed a time limit can be fatal to the exercise of the option if overlooked.

Some option agreements may have a secondary, built in time limit that only starts running following a particular "trigger event" such as the formal granting of planning permission. Thus the option agreement may stipulate that the option must be exercised within say, fourteen days of a particular planning permission being granted and this can create difficulties for the potential buyer if the agreement is worded so that the clock starts running when the trigger event occurs rather than when the buyer actually becomes aware of it.

From the perspective of the seller, being the grantor of an option, it is important to get the terms right - for example, making sure that that there is an effective ‘long-stop' date. Where options are granted pending the outcome of a planning application there can be undesirable consequences for the seller if the agreement does not address the issue of any possible planning appeal or the situation that might arise if a planning application becomes frozen for an indeterminate period.

The Business & Property Services Department of Lees Solicitors LLP can assist in the preparation and completion of option agreements covering a wide variety of situations and can advise on the most appropriate terms and conditions relevant to the land or property in question. If you are considering an option agreement and would like more advice then please contact us and we will be happy to discuss the matter with you.

Mike Read
Principle
Business & Property Services Department

 

This article provides a summary of a recent case/change in law/news item. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.


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