December 15, 2014

Option Agreements – 10 things for landowners to think about

What is an option agreement?

An option agreement is a way for landowners to achieve the increase in land values that is achieved through development without risking the substantial cost of obtaining planning permission.

Without planning permission the current use of the land can’t be lawfully changed to enable the development to take place.

That risk will be taken on by a developer and, if successful, the developer will usually be rewarded by receiving a percentage of the enhanced market value. This way a landowner can take advantage of using the skills, knowledge and funds of an experienced developer.

If the developer is successful in getting planning permission for the land but doesn’t go ahead with the option to purchase, the landowner will be left with the land with the benefit of planning permission.

Below are ten key issues all landowners should consider before entering into detailed negotiations with developers over option agreements:

  1. How much control and involvement you want in the project (personally or using a consultant).
  2. Making sure that the scheme only goes ahead if a minimum land take or a minimum value is achieved.
  3. How much control do you want over any changes in the other party to the option agreement either within its own group of companies or to a new and separate third party?
  4. How easily you can end the agreement if the developer doesn’t conform to the agreement.
  5. A timetable of the developer’s obligations so that both parties are clear what is expected and by when.
  6. The right to use the land as freely as possible while planning is sought and obtained without prejudicing obtaining planning permission
  7. Protection of the use, value and future development potential of the land which is not sold for development after planning permission is obtained.
  8. Your right as the landowner to suspend or delay exercise of the option if there is a substantial and adverse change in the tax regime.
  9. Whether the developer will make the investigations and reports it has commissioned available to you if the option is not exercised.
  10. Making sure the value of the land is not increased after it is bought from the landowner either by a new planning permission being obtained or the purchased land being used to access or provide services to adjoining land without receiving your share of that increase.
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