What is an Option Agreement?

In recent years the UK government have made their focus clear; to tackle the housing crisis through development. This in turn has seen the demand for land increase and many landowners are starting to think about how to make their land work for them. An option agreement is one way of doing this.

If you’ve been approached by a developer with a view to sell your property or land to them and heard them mention an ‘option to purchase’ agreement, but are unsure of what this really means, here’s some information that can help.

In this short article we’ll explain:

-       How an option agreement works?

-       What’s in it for you, the property owner?

-       What’s in it for the developer?

An ‘Option to Purchase’ Agreement

This is a relatively simple agreement between you, the owner of the property and the developer who is interested in buying the property.

A part of the agreement will often involve the developer adding value to your property. This typically allows the developer to agree a higher price with you than if you were to sell the property at market value, in its current form.

One way the developer will seek to add value is by successfully obtaining planning permission for the construction of new dwellings on your land.

The option agreement you will be presented with, will always be prepared by solicitors. As part of the process you will need to get it checked and looked over by your own independent solicitor before signing, with any associated costs being covered by the developer.

Importantly, the option agreement is dependent on the developer successfully obtaining planning permission.

Once the agreement is in place, the developer will work with a team of experts and invest a significant sum of money submitting a robust planning application.

If planning permission is successful, the option agreement kicks in, with a resulting sale of the property to the developer at the agreed price.

You, the owner, get paid, while the developer makes their profit when they sell the land on, with planning or once construction has taken place. It’s a win-win scenario.

If the planning application is unsuccessful, however, the agreement lapses and the property does not change hands. At this point the developer will walk away having lost all their initial investment from the planning application process.

You should NOT go ahead with an option agreement if…

-       The agreement requires you, the owner, to contribute financially to the planning application costs. These should sit entirely with the developer.

-       You have not taken legal advice and had the agreement checked by your own solicitors.

-       You do not trust the developers; you do not feel that they are knowledgeable or competent enough. If you follow the correct process, the direct financial risks to you are limited, but, an inexperienced developer may take longer to execute the process and may not have the team in place to position the project for success.

You should seriously consider going ahead with an option agreement if…

-       You believe the agreed price in the option agreement is fair.

-       The agreement requires you to take no risk, financial or otherwise.

-       You have taken legal advice and an independent solicitor is happy with the agreement.

-       You trust the developers; you feel that they are informed and experienced enough to execute the process and to best position the project for success.

All these factors need to be considered before deciding to proceed with an option agreement. It should involve no downside or financial risks for you, the property owner, only upside benefits.

If you have a question(s) or would like to discuss any potential opportunity you may have identified please contact us either by phone on 07896 228 869, email: info@seespace.co.uk or click here to use our contact form <hyperlink>.