Options agreements and conditional contracts... what’s the difference?

Option agreements

Under this agreement, the landowner agrees to provide the developer with exclusive rights to purchase their land once certain conditions are met.  However, once these conditions are satisfied, the developer is not obliged to purchase.  Common conditions include the developer securing vacant possession of the land or obtaining planning permission.

One advantage for the landowners is the developer takes on more of the risk and foots the initial cost in satisfying the conditions.  In return, the developer will ask for a deduction of these costs from the purchase price once the land is ready to be sold.  Benefits for the developer include securing the land without threat from a third party for a period of time and, if they hit trouble, they do not have to proceed with the purchase.

Landowners will usually be prevented from disposing of the property or changing its use during the option period and so they may try to reduce the option period. However, a period that is too short will not give the developer enough time to satisfy the conditions so a balance must be struck.  Provisions can also be included to extend the option period if delays are apparent.  If the land is particularly valuable, the landowner can ask for initial option fees to compensate them for restrictions on use and may try to negotiate additional or more stringent conditions on sale to obtain the best possible value/price for their land.

Conditional contracts

Similar to option agreements, the landowner agrees to sell their land to the developer once certain conditions are met.  However, in contrast to option agreements, the landowner and developer must complete the sale once the conditions are satisfied i.e. the contract becomes unconditional and a standard sale contract.

Conditional contracts are beneficial for landowners as they have more certainty that a sale will take place.  The developer will need to be sure they want to proceed with a purchase.  However, care should be taken on drafting contractual provisions as conditions which are too vague or subjective may allow one of the parties to back out of the sale if they do not feel they will get a good deal.

A deposit is usually required from the developer to secure their exclusive right to the future purchase and while this amount could be hefty, if the conditions are not satisfied and the sale does not proceed, the developer is entitled to their deposit back (barring any contract breach).

Conclusion

As with all contracts and agreements involving property taking sound professional advice is crucial as the devil is often in the detail. This is especially so for these types of agreement which often include complex price calculation parameters and detailed triggers on sale/exercising options which become important considerations further down the line.