Option Agreements - Benefits for Developers and Points to Consider

Call Options

Call options, sometimes referred to as take options, are the most common type of options over land. This type of option agreement allows the developer to 'call' on the landowner to sell a property and is commonly used by developers to secure a piece of land while applying for planning permission.

The landowner and developer will enter into the option agreement, with the developer generally paying to the landowner an option fee. The parties may agree that the option is exercisable at any time during a specific period (the option period) or only on the occurrence of certain events, such as obtaining planning permission. To exercise the option, the developer will serve an option notice on the landowner, and only after the service of such notice (and usually the payment of a deposit) will a binding contract for sale and purchase form.

Advantages

• The developer has discretion whether or not to exercise the option. If there is a sudden drop in economic markets or the planning process does not go well or the developer decides to focus its funds on other projects, call options give developers flexibility. If the developer decides not to exercise the option within the option period, the option will lapse.
• Taking an option over land means that the developer secures the property for the option period - this avoids competitors closing the same deal. The option period allows the developer to "lock in" the land and make an application for planning, before committing to pay for the property.
• Useful in site assembly where a number of plots are required from different landowners. The developer can ensure it has first secured all the plots required before exercising the options.
• The benefit of an option can be assigned, unless this right is restricted by the option agreement.

Long Stop Date

Many option agreements will allow for extensions to the option period, for example if a decision has not been made on the planning application, or if the developer intends to appeal against a planning condition within the permission. Landowners will want to avoid the option period becoming open-ended and will usually require a long stop date - a date beyond which the option period cannot be extended.

Ascertaining the Purchase Price

The purchase price is often expressed to be a percentage of the property's market value with the benefit of the planning permission obtained by the developer. If the parties cannot agree on a purchase price, the option agreement will allow the parties to instruct an expert to determine a price. The case of Redlawn Land Ltd v Cowley [2010] EWHC 766 (Ch) highlights the need to fix a valuation date when the expert is ascertaining the purchase price. The landowner in this case argued that the valuation date should have been the date the expert was instructed, while the developer argued the valuation date should have been the date the valuer ascertained the price.  In this case, the court determined that the valuation date was when the expert actually determined the purchase price. If the valuation date is left uncertain, the range of valuations may vary widely if land prices are moving rapidly. A fixed date therefore removes the incentive for a party to delay ascertaining a purchase price to take advantage of a falling or rising market.

Registration

The grant of an option creates an equitable interest in land which should be protected by registration of a notice at the Land Registry. Registration of the option provides the developer with protection if the landowner purports to sells the land to a third party and ensures that the disposal will be subject to the option.

For more information regarding option agreements, please contact David Power in our Commercial Property team on 01923 919304, or complete the form below.