Option Agreements and Conditional Contracts - the advantages and disadvantages of each for a Seller

For property owners who are approached by developers, understanding the difference between option agreements and conditional contracts is key to protecting your interests. This article outlines the pros and cons of each from a seller’s perspective, helping you to make an informed decision on how best to proceed.

Increasingly, property owners are being approached by buyers, such as developers, with suggestions of entering into option agreements and conditional contracts for the sale of their properties.

Both can impact your financial security as they can tie down your property for prolonged periods of time. Understanding the key differences between both can be useful in deciding whether either would suit you as opposed to a traditional sale.

A separate article summarising the key points and differences between the two is available here, for your information.

Option Agreements for Sellers

An option agreement grants a buyer the right to purchase your property for a pre-agreed price within a set period of time. The developer may also offer you an upfront non-refundable payment for what is effectively a right of first refusal over your property, known as an ‘option sum’.

If the developer chooses to proceed with the purchase, the sale will be governed by the conditions of the option agreement.

However, there is also the possibility that the developer may opt against exercising the option. This may be due to several factors which can include their inability to obtain satisfactory planning permission, or that the development is no longer financially viable, or simply the developer no longer wishes to proceed with the purchase.

Either way, the terms of the agreement will govern the deal, so it is advised that you obtain legal advice prior to entering into an agreement to ensure it adequately protects your interests.

Although the final decision as to whether to proceed with the purchase rests with the developer, an option may also appeal to a seller. There are several factors that may appeal to a seller which include a non-refundable initial payment made to you by the developer for entering into this agreement. The developer may also offer to purchase the property for above the current market value as a result of its development potential. Alternately, if the developer offers to purchase it for the current market value, there is no obligation on you to sell for less than what was agreed within the option agreement even if the market fluctuates, and your property value depreciates at the time the developer exercises their option to buy.

Although an option agreement may appeal to a developer, for the above reasons it can also appeal to a seller provided you are willing to accept the possibility of the sale not materialising.

When you may wish to request an Option Agreement:

• You can request an upfront fee from the developer known as an ‘option sum’ which can be non-refundable. This would be a payment by the developer to you for the period of time they are securing a right of first refusal over your property.
• You are willing to wait for the possibility of a sale, and understand that the sale may not materialise.

Conditional Contracts for Sellers

A conditional contract can offer you more certainty for a sale than an option agreement. This is because it provides that once a certain condition is met the developer must go ahead with the purchase of the property on the terms set out within the contract. Similarly to an option agreement, the contract would set out a pre-agreed purchase price. In development, the condition in question is commonly the obtainment of satisfactory planning permission.

Therefore, if you are confident that the developer will obtain planning permission, a conditional contract may provide you with added assurance that your property sale will materialise if the developer meets the condition.

However, there is still the risk that planning permission may not be granted or that the initial planning application is rejected, and the developer opts against appealing this decision. If this is the case the deal will fall through and there will no longer be an obligation on the developer to purchase your property on the terms set out within the contract.

When to use a Conditional Contract:

• You are confident that planning permission is likely to be granted.
• You want a binding agreement that ensures the developer is obligated to purchase the property if satisfactory planning is obtained, unlike an option agreement.
• You are ready to commit to the sale.

Which agreement is right for you?

Both choices require careful consideration, and consulting with a solicitor is essential to ensure your interests are protected. Here at Judge & Priestley, our Planning Department are dedicated to assisting you in deciding which method best suits your needs as well as to assist with its negotiation and drafting.

Please contact us on 020 8290 0333 or email info@judge-priestley.co.uk if you would like more information about the issues raised in this article or any aspect of Property Development Law.

For further information on our Property Development services, click here.