Real Estate and Litigation Solicitors – Naylor LLP

Taking an Option Over Land

We can advise on all the main characteristics of options over land and their advantages to developers and landowners. We will consider how they differ from other types of options and from pre-emption agreements and conditional contracts. For example:

Call options

A call option (sometimes also called a take option) allows a developer or grantee of the option to call on a landowner to sell a property to it. The option may be exercisable at any time during the option period or only on the occurrence of certain events such as the obtaining of planning permission. However, the decision whether or not to exercise the option rests with the developer. Call options are the most common type encountered in practice.

Put options

A put option enables a landowner to give notice requiring the developer to buy the property. The landowner may be able to give notice at any time during the option period or only when certain conditions precedent have been met. However, with this type of option, it is the landowner that decides whether or not to exercise the option. These options are less common than call options.

Put and call options

Put and call options (sometimes also called cross options) arise where a developer is given a call option and in return the developer grants the landowner a put option. The developer has the ability to exercise the call option during the option period and the landowner is able to require the developer to buy all or part of the property. Both options are likely to be exercisable only on certain conditions precedent being met.

Reverse options

Reverse options are occasionally used to secure an overage payment. Here, a developer buys a property and grants a call option back in favour of the landowner. The landowner can require the developer to re-sell the property to it once planning permission has been obtained. The resale price will reflect the fact that the landowner is to share in the increased development value due to the planning permission having been obtained.

The option is used purely as a vehicle for securing payment with no real intention of it being exercised. Instead, the option is released by the landowner in return for a payment from the developer.

Pre-emption agreements

A right of pre-emption over property (also known as a right of first refusal) gives a developer a right to buy the property if, but only if, the landowner decides to dispose of it during an agreed period. It is different from a call option where the developer has the right to call on the landowner to sell the property to it and the landowner is then contractually bound to sell to the developer.

With a right of pre-emption, the developer cannot force the landowner to sell the property to it. The landowner merely agrees that should it decide to dispose of the property during the pre-emption period, it is obliged to offer the property for sale to the developer first. If the landowner does not want to dispose of the property during the pre-emption period, the pre-emption right never becomes exercisable.

Conditional contracts

A conditional contract is a binding contract for the sale and purchase of land which is subject to satisfaction of a condition precedent (for example, satisfactory planning permission must be obtained before the sale and purchase provisions can become operative).

The contract will attempt to define the conditions precedent in detail so that it is clear when they have been met and when the contract will become unconditional. In the case of any dispute between the parties, the contract will usually provide for a dispute resolution procedure to be followed.