Ross Leatham, Partner in our Commercial Property Department explains what an option agreement is and why the parties involved in a land purchase transaction may want one:
An option agreement is an agreement between a landowner and a potential developer of the landowner’s property. Mostly the prospective purchaser will pay an agreed price to the landowner and in exchange secures a first option to purchase the property within a certain period of time or as a result of a trigger event for example planning permission being granted for the development.
The option agreement provides the developer with some level of protection as it prevents the landowner from selling the property to someone else whilst the potential purchaser is exploring the feasibility of the project thus reducing risk and cost to the developer. Also the purchaser may be able to agree the purchase price from the very outset bringing some certainty regarding costs.
From the seller’s point of view with the property market having its ups and downs over the past number of years an option agreement is a start to a probable deal being done although it does not guarantee a sale and if the developer does not obtain planning permission and pulls out the purchase would not go ahead.
Often something called an overage agreement is negotiated alongside the option agreement. Land will have a greater market value once it has been built upon and an overage agreement will mean the seller would be able to obtain additional payment after completion of the development based on the increase of value of the land.
Option agreements and overage agreements can be beneficial to both the seller and purchaser but there are of course potential pitfalls.