Insights What are the benefits of an option agreement in a land purchase? An option agreement is an agreement entered into by a landowner and a potential purchaser developer of the landowners property.
When the parties enter into the agreement, often an agreed payment is made to the landowner and in exchange, the purchaser is granted a contractually binding first option to purchase the property. The purchase must take place within the option period which can potentially last several years or as a result of a trigger event, such as planning permission being granted purchase of an option the development. Protection for the developer The option agreement prevents the landowner selling the property whilst the developer is exploring the bitcoins how it works of the project thereby reducing the risk and potential cost to the developer.
The land is not purchased until it is exercised by the purchaser, which can be predicated by a trigger event. A developer may be able to agree the purchase price with the landowner at the outset of the option agreement.
Investing Basics: Options
This means that there is certainty of initial costs and the developer may potentially end up paying less than market value. Often, however, any price is subject to the deduction of unanticipated costs.
Security for the seller The property market has had its ups and purchase of an option over the past 10 years. An option agreement does not guarantee a sale. On entering into an option agreement, the landowner often needs to grant a standard security to the developer which means the seller cannot sell the land to a third party for the period of time agreed in the option without restriction.
The downside for the seller is that if the developer does not obtain planning permission and pulls out of the option, the purchase would not go ahead. Overage agreements A piece of land has a greater market value after a dwelling house has been built on it.
Options Spreads What Is an Option? Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futuresthe holder is not required to buy or sell the asset if they choose not to. Call options allow the holder to buy the asset at a stated price within a specific timeframe.
Often an overage agreement would be negotiated alongside the option agreement, so that if the land was to increase significantly in value once developed, the seller is able to obtain an additional payment after completion which is calculated on the increase of value.
Option agreements and overage agreements can be positive for both the landowner and the purchaser but there are potential pitfalls that require careful navigation.
Should you require advice, do not hesitate to contact a member of our Commercial Property team.
Overview Summary In legal terms, an option is simply a right without any corresponding duty. In real estate, a purchase option assures the option holder of the right to purchase property 1 at a certain price within a certain time period but without an obligation to do so. It ensures that the land won't be sold or developed during the option period. Application of Purchase Options The purchase option is a flexible tool that can be applied to a variety of purposes: Buying time.