Where landowners or developers want to enter into an agreement for the sale of land, but the developer can’t build without obtaining planning permission, either an option agreement or conditional contract is often used.
There are important differences between the two which are often misunderstood.
What is an option agreement?
An option agreement gives the buyer the right, but not the obligation, to buy from the seller at an agreed price and within a specified period of time. The buyer usually pays an option fee to the seller in exchange for this right, which is usually non-refundable. This is to take account of the flexibility that it gives the buyer and to compensate the seller whose land is tied up for the duration of the option period, although it is sometimes deducted from the purchase price if a sale completes.
What is a conditional sale contract?
A conditional sale contract is a contract that obliges the buyer and the seller to complete the sale of the land, subject to the fulfilment of certain conditions. These types of contracts usually require the buyer to pay a deposit to the seller (normally a percentage of the purchase price). The deposit is usually refundable, if the conditions are not fulfilled, unless the buyer breaches the contract. The deposit would also be forfeited if the buyer fails to complete the sale after the conditions are fulfilled. The buyer would then be liable for all losses suffered by the seller as a result.
What are the advantages and disadvantages of each contract?
Both option agreements and conditional sale contracts have their pros and cons, depending on the circumstances and objectives of the parties.
Both types of contract secure the land for the buyer at an agreed price whilst they seek planning permission, undertake other investigations, and satisfy themselves that they can use the property for their intended purpose, but the fundamental difference is that an option agreement does not oblige the buyer to purchase the property. This can be a major advantage for a buyer but a negative for the seller, who can’t do anything else with their land for the duration of the option period and yet might still not conclude a sale.
Whether proceeding by way of an option agreement or a conditional contract, the seller will normally impose obligations on the buyer to use reasonable endeavours to obtain the consents it requires to proceed as quickly as practicable. That is to say that the buyer is expected to pursue a reasonable course of action without sacrificing their own commercial interest.
What if there is no contract?
It is risky for a buyer to proceed in pursuit of planning permission for a development without a conditional contract or an option agreement because the buyer will incur costs and, if successful in gaining planning permission, risk the seller withdrawing from the proposed sale, doing a deal with someone else, or renegotiating the price.
It is also risky for a buyer to enter into an unconditional contract to purchase without planning permission because they could be left with land they cannot develop.
If you’re looking for a solicitor to assist with the sale or acquisition of land, Farleys expert commercial property specialists can help. Get in touch to discuss your requirements today on 0845 287 0939 or contact us by email and a member of the team will get back to you.
