What is the difference between an Option Agreement and a Pre-Emption Agreement?

When buying or selling property, the terms option agreement and pre-emption agreement (also known as  right of first refusal), are used interchangeably,  however there are important differences.

What is an option agreement?

An option agreement gives a prospective purchaser a right to purchase a property from an owner at either an agreed price or a price to be determined. The option-holder is therefore in a powerful position. The owner will often demand a fee in return for the grant of the option and will limit the option period as far as possible to avoid tying the land up for too long.

What is a pre-emption agreement?

A pre-emption agreement however only gives a prospective purchaser a right of first refusal. If the owner wishes to sell the property they must first offer it to the pre-emption holder and the pre-emption holder can accept in which case the owner must sell it to the pre-emption holder, or they can decline in which case the owner is free to sell the property to a third party. Normally the owner can then only sell to someone else at a price equal to or higher than the price offered to the pre-emption holder and only for a fixed period. If a sale doesn’t conclude within the applicable period then the pre-emption rights continue and the process will need to be followed again if the owner wants to make a sale.

Agreements of either type are common in landlord-tenant relationships or development agreements. Whether a person is a prospective purchaser seeking rights to acquire a property or an owner it is very important to be clear on the type of agreement that is being entered into and carefully draft its scope to avoid any misunderstandings.

Most agreements of this nature must be registered against the owner’s title at the Land Registry to bring their existence to the attention to third parties. Failure to register properly usually means loss of the rights.

Whether you are a landlord or tenant it’s important to understand what your options are and your legal position regarding commercial property agreements. Contact a member of our commercial property team today for a no obligation discussion on 0845 287 0939 or submit your enquiry online.