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Property options allow one party (the option holder) the exclusive right, but not the obligation, to compel the transaction to formally go through to legal completion. Options are more common, with property, in favour of the buyer (the focus of this guide), but put options (where the seller can force the buyer to buy the property) are possible in specific commercial or development scenarios
Property options are typically used in situations where a party wants to secure the right to purchase a property in the future without committing to an immediate purchase. Common scenarios include:
Development Projects - developers often use property options to secure land for future development while minimising upfront costs and exposure.
Contingent Purchases - when the sale is contingent on the approval of planning permission, a developer might use an option to ensure they have exclusive rights to purchase if the project progresses.
If the option holder does not exercise the option within the agreed period, the option fee is usually non-refundable.
Each situation is different, depending upon the underlying scenario, property market conditions, negotiating positions of the parties, timescales, fee payable for the option and other variables. From the seller perspective, some will prefer overage or conditional contracts rather than buyer option agreements, with good commercial reasons.
There are several common types of property option agreements used in the UK, each suitable for different circumstances :-
Simple Option Agreement - straightforward agreement granting the holder the right to purchase a specific property at an agreed price during a fixed period. The option holder is not obliged to buy the property but is required to pay an option fee for the right.
Conditional Option Agreement - dependent upon certain conditions being met, such as securing planning permission or completing other necessary approvals. If the condition is not met, the option holder has no obligation to proceed with the purchase.
Once an option agreement is in place the seller is committed, but the buyer is only committed if they exercise the option. When the buyer serves a valid option notice, a binding contract for sale automatically comes into effect, and the buyer must complete. Because exercising the option instantly commits the buyer, they should carry out normal property due diligence (title, searches, restrictions, planning considerations) before entering into the option, not afterwards.
Benefits for the buyer option holder include flexibility, certainty in terms of price and time to secure financing or planning.
Key issues from the buyer perspective will include :-
Price Certainty - clear price calculation mechanism with caps on any increase provisions, protection against excessive increase during option period.
Planning - sufficient time to obtain planning permission, seller co-operation obligations, ability to extend period if planning delayed.
Property Access - full rights to enter for surveys, planning-related activities and investigations.
Deposit Protection - the deposit to be payable only after any conditions satisfied and circumstances when deposit refundable clearly stated, protection mechanisms for larger deposits.
Conditionality - clear conditions for option exercises such as securing satisfactory access or other rights required for intended use and minimum planning permission requirements.
Assignment - rights to assign (transfer) option to group companies or development vehicles.
Exclusivity - preventing seller from marketing or negotiating with others during option period.
From a seller perspective options should not be given lightly and there is often a lot to negotiate and include in an option agreement such as :-
Option Period - strict timeframes for exercise, with clear start/end dates and any extension provisions requiring additional payment
Payment Terms - substantial non-refundable option fee upfront, clear deposit requirements on exercise, and payment timing
Planning Conditions - obligations on buyer to pursue planning promptly, seller approval rights over applications, and information sharing requirements
Property Protection - restrictions on buyer's activities during investigations, repair obligations, and indemnities for damage
Termination Rights - clear triggers for seller to end agreement if buyer defaults or breaches conditions.
A well-drafted property option agreement will include :-
Option Fee - typically non-refundable but may be deducted from the purchase price if the option is exercised.
Option Period - usually ranging from 6 months to several years, depending on the needs of the parties.
Exercise Date - timeframe in which the option holder can choose to exercise the option and purchase the property.
Purchase Price: - may be fixed or determined based on a formula (e.g., market value at the time of exercise) or an independent valuation.
Conditions Precedent - conditions that must be met before the option can be exercised. Common conditions include obtaining planning permission or securing financing.
Exclusivity - the right of the option holder to be the sole party able to purchase the property during the option period, prohibiting the grantor from negotiating with other potential buyers.
Termination Clause - specifies under what conditions the agreement may be terminated and whether the option holder is entitled to a refund of the option fee if the agreement is cancelled.
Notice Requirements - procedure by which the option holder must notify the grantor if they intend to exercise the option.
Please contact us is you are considering a property transaction which may involve an option, whether as buyer or seller. Property law is a core area of expertise and we have some very experienced lawyers who will protect your interests and save you time and money.
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