If you need advice on option agreements, overruns, or other matters relating to commercial real estate, please contact Owen Walsh, a partner in our commercial property team Option agreements are a great way for landowners to reduce risk if a third party is interested in buying some of their land for development. However, poorly formulated agreements can be costly. Julie Liddle, a rural real estate consultant, offers her best advice on how to get it right. The conclusion of an option contract does not guarantee a sale at the end of the option period. This is a risk for the landowner as he will enter into an agreement for a few years that will prevent the landowner from selling the property to another interested party without the guarantee of a sale at the end of the option period. The real estate market has experienced ups and downs over the past 10 years. An option contract does not guarantee a sale. When entering into an option agreement, the landowner often has to provide a standard guarantee to the developer, which means that the seller cannot sell the property entirely to a third party during the period agreed in the option. The disadvantage for the seller is that if the developer does not obtain a building permit and withdraws from the option, the purchase will not take place. Purchase price: To avoid surprises, you need to be sure of how the purchase price is calculated and whether deductions apply to the unusable parts of the property, or whether these parts “allow” the remaining development? They also want the agreement to ensure that the system is only implemented when a minimum land yield or a minimum selling price is reached. Third party interests in land: Consultations with other third parties may be required before an option contract can be maintained. For example, are certain parts of the country subject to the Wayleave? Will you have access to services once the sale of the property is complete? Have you consulted your bank or someone who has an upfront fee for the property? Duration: A typical option contract is valid for three to five years, although this may be longer or extended if a developer`s construction application has not yet been completed. Therefore, you should ask yourself how a lengthy planning process can affect your business plans and whether you are entitled to additional payments if it takes longer than expected.
A timeline for the proponent`s commitments should be included so that both parties are clear about what is expected and when. Impact on unpurchased land: Sometimes a developer wants to buy the land in several stages (screech development). You must therefore ensure that the option agreement gives you the right to use the land as freely as possible while planning is sought and maintained. A tranche purchase can make a big difference in when the proceeds of the sale are received, so this needs to be clarified in the contract. Risk reduction is essential in the development of commercial real estate. Understanding the law on option contracts and overruns helps prevent simple mistakes from leading to a loss of profit and reputation. There are many more things to consider than those listed above. Don`t expect all your concerns to be taken into account when the option is designed. By then, it may be too late. Issues such as overtaking, for example, are incredibly complex and need to be addressed by an expert. With accurate design, option agreements and can provide security for developers and landowners, no matter how unpredictable the future is.
Carefully designed and agreed, option agreements can be a practical method by which landowners can offer their land for development and reap the benefits without having to be directly involved in planning or construction. With properties responsible for creating so many millionaires in the UK, it`s no wonder the market has recently brought a wave of “options opportunists” into the arena. These less experienced people are more involved in falsifying option contracts with sellers, with the sole purpose of assigning the agreement to a third party for a substantial premium once the building permit is issued. Option agreements and overtaking agreements can be positive for both the landowner and the buyer, but there are potential pitfalls that require careful navigation. If you need advice, please feel free to contact a member of our commercial property team. A developer can agree on the purchase price with the landowner at the beginning of the option agreement. This means that the initial cost is safe and the developer can pay less than the market value. Often, however, each price is subject to the deduction of unforeseen costs. Option agreements offer tremendous benefits to developers and landowners. Surpluses for landowners can significantly soften a transaction. However, as a legally binding contract, an option contract must be carefully considered by both parties.
In addition, careful development is required to ensure that the benefits and objectives of the developer and landowner are achieved and that there are no unpleasant surprises when overpayments are calculated. Usually, you will receive a non-refundable deposit at the beginning of the option, but this is not always the case. This should not be a breaking factor as it depends on the circumstances. If the developer manages to obtain the building permit for the land but does not proceed with the purchase option, you will always have a plot of land that benefits from the building permit, as well as the deposit. Once your planning advisor has approved the principle of a new construction plan, important reports are required, including a topographic survey, a park survey and a tree construction report. Once these reports are available, the results allow an architect to prepare drawings for the schematic. After receiving the planning drawings, the calculations for the construction and the expected gross development value can then be calculated. Commercial real estate development, depending on market conditions at the time of sale, can bring significant financial benefits that far exceed a landowner`s expectations at the time of exercising an option agreement. An overrun agreement (sometimes called “recovery”) allows the seller to receive additional payments if the land turns out to be more valuable than expected. Obsolescence is usually triggered by the occurrence of an event that increases the value of the property.
Common “trigger events” include: Getting away: How easy can you terminate the contract if the developer does not comply with the terms of the contract? It is necessary to clarify the conditions under which the parties concerned may withdraw from the agreement. Option contracts are contracts signed by a landowner and a potential buyer who wishes to develop the property for commercial purposes. The buyer pays the fee to ensure that they can purchase the land once they have all the permits and the project is in the final stages. The parties involved may be natural persons, companies or other legal persons. Simply put, an option contract, when used for development, is a way for landowners to achieve an increase in the value of the land without bearing the significant cost of obtaining the building permit. This risk is assumed by a proponent who, if successful, allows both parties to receive a percentage of the increased market value. The percentage that everyone receives is a trading point at the beginning. In the past, option buyers were new construction development companies that, once they had identified a property with development potential, would contact the seller directly to choose the location for an agreed period of time. Once the land is developed, it will have an increased market value, so landowners will also be able to think about mechanisms by which they can share the developer`s profits or increase the value of their land, even after it has been separated; known as “surplus agreements”. . . .