Option Agreements for Land Development

We outline the top ten points when negotiating an option agreement for land development.

1. Price and Payment Structure

• Landowner's Perspective: The price at which the land will be sold is a primary concern. It is imperative for landowners to ensure that the option price reflects the market value and any potential increases due to land value appreciation or the potential for future development over and above that envisaged by the developer. Securing an overage could assist with any concerns regarding capitalising on any future development of the land.
• Developer’s Perspective: Developers may look for a lower purchase price to mitigate risk, especially if they are uncertain about the potential future intensification of a development or development costs. They may also want flexibility in the payment structure to accommodate financial planning and project timelines.

2. Option Period and Extensions

• Landowner's Perspective: The duration of the option period should be long enough to allow the developer to secure a planning permission and assess the land's viability. However, landowners should be cautious of agreeing to overly long periods as this could impact on their ability to plan for the future and land values may go up in value. Making the price index linked upwards may assist on agreeing a mutually beneficial period.
• Developer’s Perspective: Developers will generally seek a longer option period to allow time for obtaining necessary planning permission, deal with any appeals or judicial review periods, or a period to arrange financing. If the option period is short, developers may request an extension clause to ensure they can still proceed with the development if delays occur.

3. Due Diligence

• Landowner's Perspective: Before entering into an option agreement, landowners should ensure they understand the extent to which the developer is entitled to access the property for due diligence purposes, such as surveys, environmental assessments, or legal investigations. Landowners should set clear boundaries to protect their privacy and minimize disruption and agree who will be responsible for making good any damage to the property or paying for any associated due diligence costs.
• Developer’s Perspective: Developers will require the ability to conduct thorough due diligence on the land to assess factors like environmental suitability, zoning, title, and overall feasibility for development. A clear and structured process for accessing the property and obtaining necessary documents is essential. Developers may also seek to ensure that the landowner is obligated to provide access to all relevant information and assist with any challenges that may arise during the due diligence phase, while also ensuring any shared data remains confidential.

4. Conditions

• Landowner's Perspective: Landowners should be cautious about agreeing to conditions that may cause delays, cost them money or prevent the deal from going through. These might include conditions related to entering into planning agreements, allowing the developer on site to carry out environmental assessments, or preventing them from leasing or remortgaging without developer consent. Conditions should be carefully negotiated to ensure landowners are not unnecessarily restricted on the use of their property during the option period.
• Developer’s Perspective: Developers will typically want to include conditions which will enable them to terminate an option, to ensure they don’t proceed with the option and any planning obligations if critical factors don’t align with their development plans.

5. Development Rights and Restrictions on Sales of Part

• Landowner's Perspective: The landowner should consider any restrictions the option agreement may place on the use or future sale of the land if they are retaining any adjoining land. It is important to clearly define the permitted use of the development land and whether the developer has the freedom to make changes or expand on the planned project.
• Developer’s Perspective: Developers need the freedom to modify and develop the land according to their plans. Restrictions can limit their ability to create the most profitable project. Developers may also seek to secure rights for future development or amendments to the existing plan as conditions evolve.

6. Payment of Option Fees and Legal Fees

• Landowner's Perspective: The landowner typically receives an option fee for granting the developer the right to purchase the land. This fee can be a source of immediate income. Landowners should ensure that the option fee is reasonable and non-refundable if the developer doesn’t exercise the option. Landowners will typically want their legal fees for entering into the option agreement to be covered by the developer so they are not left out of pocket if the developer does not go ahead and buy the property.
• Developer’s Perspective: The option fee is an upfront cost for the developer, and it is important to negotiate whether it’s a non-refundable fee or whether it can be credited toward the purchase price if the option is exercised. Developers often agree to be responsible for land owner’s legal fees but may want to deduct such costs from the purchase price.

7. Exercising the Option

• Landowner's Perspective: Landowners need to understand the conditions under which the developer can exercise the option, including the timing and process for completion. The landowner should ensure that the agreement includes clear notice periods and procedures for the developer to exercise their right to purchase the land particularly if they are granting an option over their primary residence and need to tie in the sale with an onward purchase.
• Developer’s Perspective: Developers will want flexibility in terms of exercising the option. If the project is delayed in the planning stages the developer should have the option to extend the length of time they have to exercise the option notice. Developers will always want a clause in the agreement to allow them to exercise the option at any point during the option period.

8. Exit Clauses and Termination Rights

• Landowner's Perspective: Landowners should consider including exit clauses to terminate the agreement if the developer fails to meet key deadlines, such as making a planning application, obtaining planning permission or becoming insolvent. This gives them a chance to pursue other opportunities if the developer cannot progress.
• Developer’s Perspective: Developers will seek termination rights in case conditions aren’t met (e.g., planning permission is denied, or financing falls through). A clear exit strategy is vital to ensure they are not stuck with a land deal that becomes unfeasible.

9. Exclusivity

• Landowner's Perspective: Exclusivity clauses grant the developer the exclusive right to purchase the land during the option period. Landowners should carefully evaluate whether granting exclusivity is in their best interest, as it may prevent them from negotiating with other potential buyers.
• Developer’s Perspective: Exclusivity is often critical for developers, as it ensures no other parties can enter into a competing agreement, giving them a competitive advantage while securing the necessary permissions.

10. Profit Sharing and Future Development

• Landowner's Perspective: If the developer plans to build a large-scale development, the landowner may negotiate a share of the profits once the land is developed and sold or may want to agree that an additional premium is paid if the developer obtains planning permission for a larger scheme that the one proposed. This can be an attractive option if the landowner is looking to maximize their return but should be carefully drafted to ensure the landowner's interests are protected. This is called an overage.

• Developer’s Perspective: Developers may seek to include terms that allow them to share profits or minimize costs based on the success of the development. They may also consider structuring a joint venture or profit-sharing agreement if the landowner is interested in a larger stake in the development.

Conclusion

The negotiation of option agreements is a delicate balance between risk and reward for both landowners and developers. By considering the above points, both parties can ensure that the terms of the agreement meet their needs and align with their goals. From securing fair pricing and payment terms to addressing risks and ensuring flexibility, a well-structured option agreement can lead to a mutually beneficial partnership, paving the way for successful land development projects. Whether you are a landowner or a developer, appointing a solicitor with a clear understanding of the key factors will ultimately set the foundations for a successful transaction.

If you would like to know more, please contact Nicki Rundle or Amit Bhangham at Thackray Williams LLP for a friendly conversation, call us on 020 8290 0440.