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Option Agreements and Conditional Contracts - the advantages and disadvantages of each for a Buyer Developer
When acquiring land for development, choosing between an option agreement and a conditional contract can significantly impact a project’s risk and flexibility. This article explores the key advantages and drawbacks of each approach from a buyer developer’s perspective.
The focus for any developer will be to secure suitable land and property for their next development project.
Deciding between an option agreement and a conditional contract largely depends on the developer’s risk appetite and the flexibility they require.
A separate article summarising the key points and differences between the two is available here.
Option Agreements
Option Agreements are the choice to proceed with if you want flexibility. An option agreement allows you to secure a property without there being an immediate obligation to buy. This is particularly useful if there is uncertainty regarding the likelihood of obtaining suitable planning permission, or if the land’s viability for development is still in question.
The benefit of an option agreement for developers is that it allows you time to assess the planning process, whilst also locking a fixed purchase price and reserving what is effectively a right of first refusal over the land and property in question.
If planning permission is granted, you can choose to proceed with the purchase. If planning is refused, you have the option to walk away, thereby limiting your financial exposure. Alternatively, you may choose to proceed with the purchase even if planning permission is not obtained.
Option agreements are therefore the choice to proceed with if you value flexibility and, for this reason, is why it is commonly used by developers who are looking to source their next development project.
When you may wish to use an Option Agreement
- If you need time to investigate the planning potential and financial viability for the property or land in question
- You want the flexibility to cancel if planning permission is not granted or if funding is not guaranteed
- You want to lock in a purchase price before the development potential is realised
Conditional Contracts for Developers
A conditional contract, on the other hand, is a more direct commitment.
Most commonly, conditional contracts in development are conditional on the obtainment of satisfactory planning permission. Once that is obtained, the developer is bound to complete the purchase.
If you are confident in obtaining satisfactory planning permission, a conditional contract may be the preferred option, as it would provide both you and the seller with greater certainty that the deal will go ahead once planning is obtained.
What constitutes a satisfactory planning permission can be clearly defined within the contract to ensure that the developer’s interests are protected.
However, conditional contracts also come with a higher risk as the seller can now hold you to the deal once satisfactory planning permission is granted, regardless of whether your circumstances have changed. Factors that may impact your circumstances may include funding for the development, increased building and material costs which can impact the financial viability of the development alongside other factors. These may all determine whether a once financially viable development project is now no longer viable.
If you choose to proceed with this method, you must be prepared to proceed with the purchase if the condition is met even if your circumstances change during the planning process and the contract period.
When to use a Conditional Contract
- If you are confident that planning permission will be granted
- You and the seller would like a more definitive agreement than an option agreement
- You are ready to proceed with the purchase once planning is approved
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 helping you to decide which method best suits your needs as well as to assist with its negotiation and drafting.
Written by George Nicolaou (Solicitor)
In our third article of this series, we discuss the advantages and disadvantages of Option Agreements and Conditional Contracts for a Seller.
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.
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