Property options, known as options over land, involve a seller granting an option for a purchaser of property (often a developer) to buy property without being tied to the purchase from the outset. In return the seller is often paid an option fee.
There are three main types of options:
- Call options (sometimes called take options);
- Put options; and
- Put and call options (sometimes called cross options).
Call options involve a landowner granting a right for a purchaser to call on the landowner to sell the property the option is subject to. This is usually exercisable at any time throughout an agreed period (the option period) or is sometimes only exercisable on the occurrence of certain events (e.g. the grant of planning permission). The decision as to whether to exercise the option remains with the purchaser and the landowner cannot require that the purchaser exercises the option and purchases the property.
The usual stages of call options are:
- The agreeing of the terms of the option. This is crucial to both parties as defines the entire option relationship.
- The payment of an option fee to the landowner upon which the landowner grants the option to the purchaser to exercise a right to buy the property during an agreed period (the option period).
- During the option period the landowner cannot usually sell the property and often cannot charge or otherwise encumber the title. It is common practice to enter a notice or restriction on the property to which the option is granted (if the property is registered).
- If the purchaser decides to purchase the property they must serve an option notice and pay a deposit (usually 10% of the purchase price less the option fee already paid). This creates a binding contract for the sale and purchase of the property on the terms set out in the option agreement.
- If the purchaser does not serve an option notice in the option period, the option lapses and the landowner is able to retain the option fee and can dispose of the property as he wishes.
Advantages for purchasers:
- The purchaser has absolute discretion whether or not to buy the property.
- The purchaser can secure the property from competitors for the duration of the option period.
- The purchaser does not need to undertake expensive searches or property enquiries before he knows whether planning permission will be granted. These will usually be completed (or renewed) prior to exercise of the option.
- Option agreements are registrable interests which provide protection if the landowner does sell the property.
- Options can be useful where a purchaser needs a number of sites to form a development and does not need to commit to the purchase of one before options have been put in place for the others.
Advantages for landowners:
- The landowner is usually paid an option fee for granting the option. This can sometimes be a significant sum and can be retained by the landowner if the purchaser does not decide to exercise the option.
Disadvantages for landowners:
- The purchaser retains the sole discretion as to whether the option is exercised.
- The landowner will usually be unable to dispose of the property and even if the option does permit a disposal (which is rare) the purchaser will take the property subject to the option.
- The landowner is often restricted from encumbering or charging the property (e.g. granting a charge over the property to a lender).
Put options are less common in practice and once granted enable a landowner to require that a purchaser buys the property. The landowner is usually able to give notice at any time throughout the option period or only once certain conditions have been met. The purchaser cannot require that the landowner sells the property.
Disadvantages for purchasers:
- The landowner retains control as to whether the option is exercised and the purchaser cannot force the landowner to sell the property.
Advantages for landowners:
- The landowner retains sole discretion as to whether they wish to sell the property.
Put and Call options
This is where:
- the landowner grants a call option to the purchaser; and
- the purchaser grants a put option to the landowner.
Both parties therefore retain the right to exercise the option and require the other party to complete on the transaction.
Pre-emption agreements (also known as rights of first refusal): provide a purchaser with a right to purchase the property but only if the landowner decides to sell the property within an agreed period. They differ from put options in that even if the landowner decides to sell the property the purchaser is not required to buy the property. The landowner simply has to give notice of its intention to dispose of the property and the purchaser then has a set period to decide to agree to purchase.
Conditional contracts: are binding contracts for the sale of property under which the completion of the sale and purchase is conditional upon defined conditions precedent (e.g. the grant of planning permission). The difference between conditional contracts and option agreements are that upon satisfaction of the conditions precedent the completion of the sale and purchase will automatically be triggered.
For further information on this or any other property-related matter, please contact our Property department on 0161 832 3304.