Ways we buy …
Land buying
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Why would you (the landowner) want to use an option agreement?
You (the landowner) may recognise the fact that their property/land has significant development potential, but you don’t have the resources or expertise to pursue a planning application to ensure maximum the value. An option agreement provides you (the landowner) profit from the enhanced value of their land as a result of planning permission being granted, without having to go through the planning process yourself.
Buying Property
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What is an Option Agreement?
Option Agreements are a legal contract between a landowner and potential purchaser of a site, typically a housebuilder or developer like ourselves. We (the option holder) basically has the opportunity of purchasing the site from the you (the landowner) at an agreed price within a fixed time frame, once the terms within the option have been met.
An Option Agreement benefits both landowners and developers: a landowner has the comfort of a developer promoting their site for development; and the developer has some security with regards to future pipeline for delivery, typically at a discounted purchase price to reflect the planning risks.
The terms of an option tend to relate to planning, with the agreement allowing time for a site to be promoted through the planning process and for relevant planning permission to then be obtained. Once this happens, a Price Notice is normally served to the landowner, which then triggers the price negotiation process and the purchase of the site through an Exercise Notice.
The purchase price mechanism typically reflects a percentage discount from the market value at the time of exercise, often also including additional deductions for an option fee and planning promotion costs. The process of agreeing a price can be difficult because there is no transaction that takes place whereby the market value is determined by competing bidders on the open market.
A negotiation therefore needs to be entered into to debate the value of the completed development, costs of the development and developer’s profit in order to assess the market value of the site. Local market conditions and comparable land transactions also need to be analysed when negotiating the value of a site. A purchase price can then be agreed between the landownder and option holder following this negotiation process.
If the landowner and option holder cannot agree on a purchase price there should be provisions in the agreement for dispute determination. This normally involves the appointment of a suitably experienced Independent expert or arbitrator who is also a chartered surveyor. The expert can either be agreed between the parties or appointed through the RICS.
Normally, written representations that detail the market-based evidence and appraisals used to support the assessment of market value and purchase price are submitted, by both the landowner and option holder, to the expert for consideration. There is then usually the opportunity to provide cross representations to the expert based on what the other side has submitted within their written representations.
The expert should then determine the purchase price, with the option holder then able to decide whether or not to purchase the site at the determined price.
