Option Agreement Solicitors
At Lawhive, our network of expert property solicitors is on hand to help you in drafting and reviewing an option agreement for fixed fees.
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What is an option agreement?
An option agreement is a contract between a landowner and a developer that gives the developer the chance, but not the obligation, to buy the land within a set time frame.
In this agreement, the developer usually pays a nominal fee to the landowner, often as little as £1. The purchase price for the land may be agreed upon upfront, or there may be a method outlined in the agreement to calculate it later, usually based on the future value of the land with planning permission.
Benefits of an option agreement to a developer
Option agreements prevent a landowner from selling a property to someone else while the developer carries out checks to see if their project is viable.
If it is, the developer can buy the property by 'exercising' the option. This makes it mandatory for the landowner to sell and the developer to buy according to the terms of the agreement.
If the project isn't feasible, the developer can walk away without any penalties, letting the option expire.
Potential risks of an option agreement for landowners
An option agreement doesn't guarantee a sale. This can be a risk for the landowner because, in agreeing, they make a commitment for a set period with no solid promise of a sale at the end.
In some situations, developers can't get the necessary planning permission and they won't buy the land.
There are ways to mitigate these risks in agreeing, therefore, it's a good idea for landowners to find a solicitor to help with this kind of agreement to ensure they know all the risks and take steps to reduce them where possible.
Benefits of an option agreement to a landowner
In an option agreement, there is more risk to a landowner because the buyer might change their mind later.
However, if done carefully, option agreements can be a good way for landowners to profit from their land without dealing with planning or construction.
Furthermore, if after development a property or land's value increases, landowners might be able to share in this profit, even after the development is completed, with the addition of an overage agreement.
What is included in an option agreement?
An option agreement usually includes:
Names and addresses of both parties involved;
Detailed description and map of the property;
The 'option fee' paid to the landowner;
The 'exercise price' (aka how much the property will cost if the option is exercised);
How long the agreement will last before the option expires and the potential buyer can no longer exercise their right.
What costs are involved in an option agreement?
In option agreements, there are two main costs to consider:
Option fee
The option fee is paid by a potential buyer to secure the agreement. It is sometimes nominal, but it can vary based on the property and situation.
Exercise price
The exercise price is what the buyer pays when the option is exercised. Exactly what the option price is depends on the agreement. It may be:
Based on the property's market value when the option agreement is signed;
Based on the property's market value when the option is exercised;
Based on the site's development value at the time of exercising the option, adjusted for additional costs like professional fees, planning permission, and developer profit. This usually applies to development land.
Keeping the above in mind, it's usually a good idea to have a property or piece of land independently assessed by a qualified value to understand its market value and shape an option agreement.
Is a developer required to buy if they sign an option agreement?
No, the potential buyer isn't required to buy the land. They have the choice to exercise the option or not during the agreed 'option period.'
If they choose not to exercise the option during this time, the landowner keeps the option fee and they can go on to do what they want with the land, like sell it to someone else.