Options Agreements Explained: A landowners Guide
“A developer has offered me an options agreement, but what does that actually mean?”
If you are a landowner and have this question running through your mind then you have come to the right place. We are a design-led property development business focused on unlocking development potential within the UK, London, Essex and Hertfordshire areas.
In this article we will provide you with full clarity on what an options agreement is, why they are an essential tool for landowners and developers, and provide you with our options agreement checklist as a downloadable resource. Let’s dive in!
What is an Options Agreement?
Put plainly, an options agreement is a contract that allows the landowner to grant the developer the legal right to buy, sell or lease within a specified period — but not the obligation to do so subject to agreed terms.
This essentially gives the developer time. The last thing a developer wants is to risk spending a considerable amount of hours, money and effort into unlocking a site's potential, only to have the landowner sell to someone else.
Why should a landowner use an Option?
If you are looking to sell, why not get the most of the deal. There are many sites that would benefit from gaining planning approval, and this process is a proven way to unlock hidden development potential. However the planning process, especially in the UK, is very risky.
Understanding the legal planning process, legislation and ensuring the development has market potential requires a lot of work and consultation. So why not let the developer take the risk, and get more than you paid for the site as the result.
How does the options agreement work?
For example, say your agricultural or back-land plot is worth £150,000 today. Volume Metric Ltd would then use our sophisticated SearchLand software to analyse the site's potential risks and red flags. My team and I then produce an appraisal to see if the site is viable, and if we discover for instance that your site has development potential, we will then reach out to you and understand what you want to achieve in this development, and agree on a 2-3 year option.
This then gives Volume Metric Ltd time to spend however much, 30-60k for example on surveys, consultants and drawings to produce a planning application. Then with planning permission granted, the land is now worth, say, £700,000. Volume Metric Ltd will now have the option reserved to them for the first chance to buy with the purchase price determined by an agreed valuation mechanism. This might be something like market value with an agreed discount.
Please note that these are just illustrative figures used just as an example, every site and situation is different and needs to be appraised accordingly.
Can’t the developer just buy land outright?
Unfortunately this would be a very speculative and frankly quite a risky thing to do. This is where land sourcing differs from normal property investment, because the value has not been unlocked yet. Getting planning approval is uncertain, expensive and requires expertise. Essentially, you as the land owner supply the opportunity, and we the developer supply the strategy and take on the financial risk. So value needs to be unlocked before buying.
What does the developer do during the options period?
During this time we as the developer step into motion and deploy our expertise to fully utilise the opportunity you have provided.
This all starts with a detailed feasibility study that will elaborate on the initial viability study done previously. This involves looking at planning policy and researching the site constraints in more detail. Furthermore, this creates a solid foundation to formulating a brief; that an architect can help develop, in order to create a conceptual design.
Then after a process of consultation and coordination of pre-application strategies, we can formulate the planning applications and begin negotiations with the Local Planning Authority.
How is landowner protected?
To prevent the land from sitting idle, the options agreement requires us as the developer to be actively seeking planning permission. We can’t just secure an option and agreement and let nothing happen. Additionally the options agreement will have an expiry date to break the agreement if we the developer take too long in securing planning permission.
Moreover, if the planning approval results in a huge site uplift value than previously expected, then there are overage clauses within the agreement that protect the landowners equity in the share of that increased value.
This is why options agreements are so important and highly regarded for both landowners and developers as an investment tool.
Options agreement vs promotions agreement
Understanding the difference between an options and promotions agreement is vital for landowners because they will most likely encounter both. I will make sure to do a full article on this topic, but let’s briefly touch on this now.
Essentially with an option, the developer secures planning and buys — whereas with a promotion, the developer secures planning, then markets the site and takes an agreed share of the sales proceeds.
However what remains the same throughout is that the landowner does not take on the planning risk, which is why these two agreements are quite often employed, and really it just comes down to what the landowner’s goals and ambitions are.
Could your land have development potential?
I hope this clarifies the utility of the options agreement as a tool for both the landowner and developer to unlock hidden development value within the UK, that would otherwise not be possible..
If you are a landowner who has a site that they think might have potential for development but are unsure how successful they would be in getting approval then get in touch with us. We can do an initial assessment to identify planning opportunities, rather than jumping straight into any agreements.
Click here to download our options agreement educational checklist!
We are a design-led property development company who has partnered with BuildUp as our financial backers and you can leverage our developers network to build the best strategy for winning planning approval. We are dedicated to building a better British future in housing development, and cherish the opportunities landowners provide.
You can get in touch with us today using the contact form below.
