Demystifying Option Agreements: A Practical Guide

Option agreements are commonly used in development transactions, giving developers the opportunity to apply for planning permission on a site without committing to its purchase prior to doing so. However, these agreements are often complex and require careful drafting to ensure both parties’ interests are protected.

This blog will explore what option agreements are, the complexities around them, and some of the key drafting points that ought to be considered.

What is a ‘Call’ Option Agreement?

A call option agreement is the common type of option used, and grants the developer the right, but not the obligation, to ‘call’ upon the landowner to sell their property to the developer. This gives developers the certainty of being able to secure land while waiting for planning permission to be issued and can be useful in site assembly. They also provide flexibility should such permission not be granted, other parcels of land not obtained or if fraught market conditions make the price of the land unviable to their development scheme. This is due to their nature of granting a right but not an obligation, therefore a developer may simply decide not to exercise this right and let the option lapse.

It is worth mentioning that a ‘call’ option agreement is not the only type of option agreement, and in fact there are several more:

• ‘Put’ option: This is where the landowner requires the developer to purchase the land when exercising the option, rather than the other way around. This is far less common than a ‘call’ option.
• ‘Put and call’ option: Also known as a ‘cross’ option, this is an agreement whereby a developer is granted a ‘call’ option and in return a landowner is granted a ‘put’ option.
• ‘Reverse’ option: Whilst rare, these are occasionally used to secure an overage payment. In brief, the developer buys property and grants the landowner a ‘call’ option once planning is obtained, with the price reflecting the increased value from the planning permission’s impact.

Difference between a ‘Call’ Option and Conditional Contract

Where option agreements offer flexibility in providing a developer the right to purchase, a conditional contract is a binding contract for the sale and purchase of land, that is subject to the satisfaction of a ‘condition precedent’ (i.e. grant of satisfactory planning permission).

This puts an obligation (not a right) on the developer to purchase the land at the point in which the conditions are met; with the key drafting defining the conditions in detail to ensure no ambiguity as to the point at which the contract becomes unconditional. Whilst a conditional contract will often include ‘Buyer’s Unacceptable Conditions’ in relation to the planning permission granted, if a developer wants the freedom and flexibility to decide whether the planning permission is satisfactory, a ‘call’ option is a more suitable structure than a conditional contract.

Complexities of Option Agreements

Option agreements can often involve numerous variables such length of the option period, when the option can be exercised (e.g. at any time during the option period or when certain conditions are met), the planning process itself and price determination. All of these factors can make the agreement complex, necessitating the need for careful and considered drafting.

Key Drafting Points

• Option Period: Define the duration within which the developer can exercise the option. This should be reasonable and aligned with the time needed for any necessary conditions to be met, but also provide extensions if planning permission is not granted and an appeal is to be made. Landowners will not want this left open-ended, however, and will usually insist on a long stop date – a date on which the option can no longer be extended and comes to an end.
• Option Fee: Specify a fee payable by the developer for the option on exchange, with the fee varying depending on the current market value of the land and potential. Considerations must also be made as to whether this fee is to be non-refundable and / or deducted from the eventual purchase price.
• Purchase Price: Decide whether the purchase price will be fixed or determined by a formula, such as a percentage of the market value subject to deduction of any planning or other costs, etc. Careful consideration should also be given the exact timing of the valuation date (e.g. on service of the notice, appointment of a valuer, etc.) as in a rapidly moving property market, the price could significantly differ.
• Restrictions: Determine if the option can be assigned by the developer and if so, whether there are any restrictions on who it can be assigned to.
• Protection: A developer will want to protect their interest in the land granted by the option, with the most common and preferred method being a restriction registered against the landowner’s title to the land at HM Land Registry which prohibits them selling without the developer’s consent; which would usually be given once certain criteria have been met including a deed of covenant from the assignee. From a landowner’s perspective, you will want to ensure that there are provisions to deal with the removal of such restrictions from the landowner’s title promptly following compliance with the criteria / expiry of the option period.

How can we help?

Option agreements are a valuable tool in development and can offer strategic benefits to both developers and landowners. However, they can often be complex and require careful drafting, which can certainly be daunting to landowners if they have never had dealings with them before.

Our Development and Social Housing teams at EMW regularly act for developers, housing associations and landowners in the negotiation of option agreements of varying complexities and have the benefit of many years of experience with these matters. We also regularly advise in all other aspects of development work; from acquisitions of development land (whether land-led, part of a Section 106 deal, conditional or subject to other factors such as overage) to disposals, planning and infrastructure agreements and strategic land and site assembly, thereby offering a full service to our clients.

For further information or if you would like to discuss any development matters with us, please do not hesitate to get in contact.