Option agreements and call options
There are multiple factors that must be taken into account with option to purchase agreements. The buyer is given the right to buy the land for a certain period of time and this option is usually subject to one or more trigger events. A common trigger is the grant of planning permission.
There are benefits for both the buyer and the seller with an option to purchase agreement.
The buyer has the reassurance that the land cannot be sold to another party. The purchase price can be fixed providing certainty for both the seller and buyer. Alternatively, in the event the option is conditional on planning, a formula can be used to determine the final price based on the outcome of the permission. A common formula used is a fixed price depending on the number of properties or units for which planning permission is granted. The buyer also has complete discretion whether to buy, can block competitors, is not committed to buy if planning is not granted or subject to unacceptable condition. An option is a popular choice as it also requires minimal outlay at the initial stages.
The benefits of an option for a seller is certainty on price. The price or formula is often fixed and is not dependant on market changes. The option sum is often retained even where the option is not exercised. A seller can sometimes take advantage of the developer’s experience in obtaining planning permission, often at no cost to the seller. The seller may also benefit from an increase land value where planning is granted even if the buyer decides not to proceed.
There are many factors to consider when entering into an option agreement. Issues to consider include:
- Timescales and the period of the agreement
- The extent of land and/or property included
- The conditions or triggers events determining when the option becomes exercisable
- Any deposit or option fee payable
- If extensions are possible and on what terms
- The final purchase price or formula
- Termination clauses
This list is not exhaustive but is intended to give an indication of the factors to be considered when entering into an option.
Options are usually exercised by the buyer giving the seller notice. By giving notice a binding contract for the sale and purchase of the property arises as set out in the agreement. If no notice is served, the option lapses with the owner being free to sell or dispose of the land free of the option.
A put option is very similar to a call option with the control this time being with the seller. A put option is where the seller can give the buyer notice during the option period to purchase when certain conditions have been met. These are less common than call options noted above.
Put and call options
Put and call options are also known as cross options. These are a combination of the put and call options detailed above. The buyer usually has the ability to exercise the call option during the option period and the seller is also able to require the buyer to purchase all or part of the property. Both options are usually subject to certain condition precedents being met.
Reverse options can be used to secure an overage payment. Here, a developer buys a property and grants a call option back in favour of the seller. The seller can require the developer to re-sell the property once planning permission has been granted. The resale price will reflect the fact that the seller is to share in the increased development value due to the planning permission having been obtained.
The option is used purely as a vehicle for securing payment with no real intention of it being exercised. Instead, the option is released by the seller in return for a payment from the developer.
Pre-emptions are different to options in that they give the buyer a right to buy land, but only in the event the seller decides to dispose during the pre-emption period. The buyer cannot force the seller to sell.
How can we help?
At Stephensons we have experienced professionals who can assist you in deciding on the most suitable form of agreement. We will consider the entire project or transaction, helping you decide which best suits your goals.
We can also assist considering tax implications via our network of professionals. We have a wealth of experience and would be pleased to discuss your needs.
Our commercial property solicitors act for landowners and developers and have vast experience in dealing with land that has been identified as having development. All of these agreements need professional drafting to ensure you are fully protected.
At Stephensons we can assist you from negotiation through to completion of the agreement and ongoing monitoring following completion.
Get in touch to discuss your needs and see how we can help - call us on 01616 966 229 or complete our online enquiry form and we will contact you directly.