An option contract is an agreement between a landowner and a potential buyer (developer) of the landowner. When the parties enter into the contract, an agreed payment is often made to the owner of the land and, in return, the buyer receives a first contractual option for the acquisition of the property. The purchase must be made within the option period (which may take several years) or as a result of a trigger event, such as. B issuing a building permit for development. a) Appeal option – if a buyer has the right (but no obligation) to buy the property from the seller. b) Option to sell – if the seller has the right (but again without obligation) to sell the property to the buyer. c) Cross option – the buyer receives a call option and the seller receives a sale option in return. d) Reverse option – sometimes these types of options are used to secure an overrun payment (more on overruns below…). Here, the seller gets the option to buy back the property after the “trigger” event if the overspend payment is not made.
The resale price reflects the increase in the value of the land as a result of the “trigger” event (e.g. B issuing a building permit). Duration: A typical option agreement is three to five years, but it can be extended or extended if a developer`s planning application is underway. Therefore, you should think about the impact that a lengthy planning process can have on your farm plans and whether you are entitled to additional payments if it takes longer than expected. A timetable for the promoter`s commitments should be included so that both parties are clear about what is expected and when. Impact on unasselected land: Sometimes a developer wants to buy the land in several stages (development in increments). You must therefore ensure that the option agreement gives you the right to use the country as freely as possible while the planning is requested and preserved. A purchase per tranche can make a big difference when the proceeds of the sale are received, so this needs to be clarified in the contract. The terms of an option tend to relate to planning, with the agreement providing the time required to promote a site through the planning process and the corresponding building permit.
Once this happens, a price notice is normally sent to the landowner, triggering the pricing process and the purchase of the site through an exercise notice. The asset received by the option is referred to as the underlying. Simply put, an option contract, when used for development, is an opportunity for landowners to achieve an increase in the value of the land without bearing the considerable costs associated with the granting of the building permit. This risk is taken by a developer who, if successful, allows both parties to obtain a percentage of the improved market value. The percentage that each receives is a bargaining point at the beginning. Therefore, negotiations must begin to discuss the value of the final development, the cost of development and the developer`s profits, in order to assess the market value of the land. Local market conditions and comparable real estate transactions must also be analysed when trading the value of a site. At the end of this negotiation process, a purchase price can then be agreed between the owner of the land and the option holder.