An option to purchase (an option agreement) is similar to a conditional contract except that under an option agreement the developer is not usually obliged to purchase the land in the event of satisfactory planning permission being granted. This is the main difference between an option agreement and a conditional contract.
The most common type of option agreement seen in practice is a call option. A call option allows a developer or grantee of the option to call on a landowner to sell a property to it. The option may be exercisable at any time during the option period or only on the occurrence of certain events such as the obtaining of planning permission. However, the decision whether or not to exercise the option rests solely with the developer.
The various stages involved with a call option are:
- The landowner and developer enter into an option agreement. On payment of an option sum by the developer, the landowner agrees that the developer will, during an agreed period (the option period), have the right to exercise an option to buy the property;
- If the developer decides during the option period to buy the property it must serve an option notice on the landowner and pay a deposit. On service of the option notice within the option period, a binding contract for the sale and purchase of the property then arises on the terms set out in the option agreement;
- If the developer does not serve an option notice within the option period, the option will lapse and the landowner can dispose of the property free of the option.
There are a number of advantages to developers of taking a call option:
- The developer has complete discretion over whether or not to buy the property.
- The developer can secure the property from its competitors for the length of the option period.
- The developer can apply for planning permission knowing that it can buy the property if it is successful, but does not have to buy if planning permission is not granted or if it is granted subject to unacceptable conditions.
- Minimal outlay is required at the initial stages before the developer knows whether planning permission can be obtained.
- An option agreement is registrable, providing protection if the landowner sells the land to a third party.
- It is 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 before exercising the options.
Although options are usually proposed by developers for their own interests, there are certain advantages to landowners in granting an option:
- The landowner can demand an option sum in return for granting the option and tying up the land for the length of the option period. Sometimes the option sum is a significant amount and this is usually retained by the landowner whether or not the option is exercised;
- The landowner can take advantage of the developer’s experience and skill in obtaining planning permission at no cost to the landowner;
- Where the developer is seeking planning permission to develop a larger site that includes other land, the market value of the property may be considerably increased over and above any development value that the property may have on its own.
Whilst a call option is the most commonly used option agreement, other types of option do exist:
- Put Option. A put option enables a landowner to give notice requiring the developer to buy the property. The landowner may be able to give notice at any time during the option period or only when certain conditions precedent have been met. However, with this type of option, it is the landowner that decides whether or not to exercise the option;
- Put and call option. Put and call options (sometimes also called cross options) arise where a developer is given a call option and in return the developer grants the landowner a put option. The developer has the ability to exercise the call option during the option period and the landowner is able to require the developer to buy all or part of the property. Both options are likely to be exercisable only on certain conditions precedent being met.