Selling land to a developer
With the ever increasing demand for property, some landowners are considering selling some of, if not all of their land to a developer.
Commerical Property solicitor Patsy Whitford looks at option agreements and conditional contracts.
What is an option agreement?
An option agreement is a legal contract that gives a developer the right to purchase land or property from a landowner. Option agreements are often agreed to be within a specific period of time at a certain price.
Is an option agreement legally binding?
An option agreement only becomes legally enforceable once both parties agree and the seller accepts an offer. Once the seller accepts a given amount of money from the buyer, within the designated time of the contract, then the contract becomes legally binding.
How long does an option agreement last?
Generally, an option agreement will last from 3-5 years, however this is dependent on whether both the buyer and seller agree on a different timespan. Some agreements include the right to extend the time frame, buyers can do so by paying an additional fee to the seller.
An extension may be considered in times of uncertainty, or other external factors that affect the purchasing of a property (such as COVID).
Pros and cons of option agreements
How does an option agreement benefit a land developer?
An option agreement often ties the seller but does not tie the buyer, meaning the buyer has the freedom to decide whether or not they wish to purchase without having to provide a reason.
For this reason, option agreements are a desirable and flexible instrument for a buyer.
How does an option agreement benefit a landowner?
On the flip side, it also enables landowners to increase the market value that is achieved through development, without risking the substantial cost of obtaining planning permission.
What are the disadvantages of option agreements?
Disadvantages of option agreements for landowners
The main disadvantage of option agreements for sellers is that there is no guarantee of sale, seeing as the buyer only has the option to buy. In addition, the property will not be put on the open market for third parties to make offers. Meaning that the landowner may receive considerably less from a developer.
Lastly, when a developer places an option agreement over a property the landowner may lose control of the land seeing as it is tied up by the developer. Some developers may deliberately ‘tie-up’ specific land, only to see that their competitors can’t purchase it. This obviously has a negative impact on the seller, as it makes it difficult for them to try and sell elsewhere.
Click here to read the full article.