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Conditional Contracts v Options

The article below follows on from our series of seminars for Junior Land Buyers. Click here to read the previous article.

When acquiring land for development, developers are unlikely to want to buy a piece of land straight from the landowner. There's a risk that they won't be able to obtain suitable planning permission or there might be third party occupiers that are difficult to remove. No developer wants to be stuck with an unprofitable site. However, if a site is ripe for development, the developer will want to ensure that it isn't snapped up by a competitor.

Some of the possible solutions to this conundrum are to enter into a conditional contract or option, with usually a non-refundable premium paid to the landowner. These agreements allow the developer the opportunity to secure the land, but until they are sure that the land is right for their development, they are not under an obligation to complete the purchase. These type of agreements stop other developers from acquiring the land and ensure that the developer has some control over the planning process.

Conditional Contract

A conditional contract has to include a specified condition that once met, the developer must complete. This can be for a number of reasons, but most commonly it concerns vacant possession of the site or obtaining a suitable planning permission.

The terms of a condition have to be clear and certain, so if this is based on obtaining planning permission, the developer must carefully consider what a 'satisfactory planning permission' means to them. For example, this can include the level of CIL payments, the housing mix of open market to affordable or the number of units permissible under the planning permission.

The landowner will be trying to make the definition of the condition as wide as possible, as the contract will become 'unconditional' once the condition has been met. At this point, the developer will be bound to complete the purchase of the land.

Option

An option works slightly differently to a conditional contract, as it gives the developer a right to insist that the landowner sells the land to the developer if they wish to buy it within a defined option period (which can be for number of years) or a 'trigger event' occurs, such as the grant of a satisfactory planning permission.

Like a conditional contract, the option gives the developer certainty that the landowner cannot sell the site whilst the developer is assessing the viability of the land. An option gives a developer more flexibility as they will not be obliged to exercise their option in the event they do not wish to do so.

A developer friendly option, known as a 'call option' will not put any obligation on the developer to exercise the option. It is at the developer's discretion whether they exercise the option or not. In reality though, a developer is likely to have incurred significant cost exploring the profitability of the site and unless there are significant issues, it is not common for a developer not to exercise an option.

For more information on the article above please contact Lola Skuse.

Ashfords run a series of seminars for anyone involved in the world of real estate development who would like to learn more about the legal process behind the deals. The seminars are led and organised by our team of residential development solicitors, providing an opportunity to share knowledge and build lasting connections in an informal and friendly environment. Here are a list of future seminars for Junior Land Buyers, please let us know if you would like to receive notification of these events.

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