Explore your Options: Top 10 Tips with Option Agreements
- Carefully consider the option duration - 3 to 5 years is typical but how might planning delays affect pricing or the landowners ability to deal with the land. Agree a timetable for each phase of the process. What extensions will be agreed?
- The developer wishes to secure the right to purchase the land for lowest possible price. Fixed or minimum pricing or use of the standard Red Book valuation can alleviate tension and provide greater certainty on pricing.
- Set out each party’s obligations clearly. Clear drafting will avoid costly disputes.
- Agree if there will be overage - this is often required to allow landowners to share in future increases in value. How will the overage be secured – by covenant, restriction, guarantee?
- Landowners should ensure only reasonable costs are deductible and consider a cap on certain costs to mitigate impact on final receipts to the landowner.
- Deal in advance with third party interests. Consult with any lenders and ensure all necessary access and servicing rights will be in place.
- Agree a clear disposal timetable following planning consent – what flexibility will the developer have in the timing of carrying out the valuation?
- Be clear on how each party may terminate and include a disputes resolution procedure.
- Involve tax advisers at an early stage. Consider including tax freezer clauses in case of substantially adverse tax changes.
- Take the advice of a chartered surveyor experienced in the valuation and sale of residential development land, especially if the seller is a trustee when a failure to do so probably is a failure to discharge the trustees obligations.
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