A guide to Options and Conditional Contracts

“There’s gold in them tha’ hills” goes the old saying. Or more accurately, there’s money to be made from your own bricks and mortar and garden land.

Now I have your attention what do I mean and how can you get your hands on it?

Frequently we are asked to advise either developer clients or house owners where a developer wishes to purchase either a whole property or part of a property, usually a garden area, from an individual with a view to developing the same.

Very often the developer is seeking to develop a larger area so that will involve buying a number of adjoining properties or garden areas.

However, if the developer does not wish to complete a purchase without being certain they have obtained planning permission to carry out their proposed development and equally they do not want to apply for planning permission before they have a binding agreement which enables them to purchase the property or properties.

The reason is that a planning permission is not the property of the applicant but benefits the land so a permission obtained before there is a binding contract would enable the property owner to benefit from the fact that permission had been obtained without selling the property to the developer.

Therefore, to enable such a transaction to proceed there are two usual types of contract:

One is an “Option” and commonly this would be an agreement which would last for a set period of time “the Option Period” of say 6 to 12 months to and if at any time during that period the developer required the house owner to sell the property to them then the house owner would be bound to do so at the price agreed in the Option Agreement.

This benefits the developer because they can seek planning and if obtained serve Option Notices on all the house owners at the same time and secure the whole development site.  In this way the money they have invested in obtaining planning permission will not be wasted if they do obtain a satisfactory consent.

The situation does create uncertainty for the house owner in that they do not know whether or not the developer will exercise the Option and there is no obligation on the developer to do so even if planning permission is obtained, it is usually entirely at their discretion.

Often for the house owner this is worthwhile for the potential windfall payment perhaps obtaining an added value for the property or area of land that they could not expect to receive otherwise.

It is also fair to say that the Option Agreement can contain all sorts of different provisions and be drafted heavily in favour of one party or the other although clearly our obligation acting for our clients is to make sure it is as far to them as possible.

The other type of agreement commonly used in these situations is a “Conditional Contract” and this type of agreement is different in that if the condition is satisfied then the developer is bound to buy, and the seller is bound to sell on whatever is the agreed completion date.

In this situation the condition is normally the developer obtaining a satisfactory planning consent for the development.

While such an agreement might sound more attractive to a house owner in that there is more certainty that the transaction will proceed if planning permission is obtained often the conditions are so widely drawn that in effect the discretion is still with the developer to decide if the planning permission obtained is satisfactory and economically viable.

However again our task would be to ensure our client, whether developer or house owner, is protected as far as circumstances permit.

These agreements will contain all sorts of provisions, some are common, e.g. a right to extend the Option Period or contract period if there is an appeal or a challenge to the planning permission.

Some agreements will have a fixed purchase price and other might be based on the terms of the planning permission, others will include a provision for “overage” which is an additional payment if a “better” planning permission is obtained then or in the future although there are overage provisions while appearing attractive can be difficulty to get right and protect.

There will also be clauses about fencing, sometimes new covenants preventing further development without consent and even on occasion the developer might be asked to rebuild something for the house owner as part of the consideration.

Where there is a mortgage, lenders should be involved and their consent obtained.

We have long experience of dealing with both types of arrangement and other similar agreements such as joint venture arrangements and would be pleased to discuss and advise with developer and house owner clients what is best for them if this sort of type of opportunity arises.

If you would like further advice or assistance on any of the points raised above whether as Landlord or Tenant please do contact either myself, Donald Morrison, or David Hards.