Big changes in UK planning policy are reshaping the development landscape, adding a fresh layer of relevance to land options. With increased emphasis on housing targets, local development plans, and streamlined application processes, land developers find themselves with a window of opportunity to secure planning permissions that previously may have proved too difficult or costly to obtain.
For landowners, this could be the perfect moment to unlock the hidden potential of their land by partnering with developers through option agreements, especially for sites that may not have been viable under previous regulations. A well-structured option agreement allows developers to navigate these evolving policies while offering landowners a potential route to sale that aligns with the changing planning landscape.
What is a Land Option?
A land option is a legal agreement where a landowner grants a developer an exclusive right, but without obligation, to purchase a piece of land within a specified timeframe. Usually, the option is granted in return for an option fee payable by the developer – essentially a payment to a landowner to tie up the land for the duration of the option.
A landowner’s opportunity
Granting a land option to a developer is a strategic decision that landowners often face. It allows developers the opportunity to purchase land in the future while offering landowners some immediate benefits (usually including an upfront payment). However, like any legal agreement, it comes with its own set of risks and considerations.
What’s in it for the Landowner?
- Upfront Income: Landowners usually receive an option fee upfront, which compensates them for tying up the land (although landowners should note that this is often deducted from the sale price should the option be exercised and the land sold).
- Potential for a Higher Sale Price: If the developer secures planning permission, the value of the land can increase significantly. Option agreements can be structured so that the sale price is assessed after planning permission has been obtained, and therefore at a potentially higher value, as opposed to when the option was entered into at a time before a planning permission is in place.
- Transfer of Costs and Risk: The process of obtaining planning permission for land can be both lengthy and costly. By entering into an option agreement, a landowner can pass to the developer the cost and risk of obtaining planning permission, whilst also maintaining some degree of influence over the direction of the development.
The Downsides
- Exclusivity: Once an option has been entered into the land cannot be sold to anyone else during the option period, potentially tying the land up for years. That’s fine where there is no short term need to sell but could potentially be an issue should circumstances or financial needs change.
- Price Risk: If the option agreement fixes a sale price but market value increases significantly, a pre-agreed price in the option may be lower than the market rate at the time the option is exercised and the land sold.
- No Guarantees: An option is exactly that – it gives a developer the choice but not the obligation to buy land. A developer may choose not to exercise the option, even if it has obtained a planning permission, leaving the landowner without a sale.
Making the Most of the Opportunity
Granting a land option can be a beneficial arrangement for both landowners and developers, particularly when there’s a shared interest in unlocking a site’s development potential. However, landowners must carefully consider the terms and duration of the option agreement, understand the potential risks, and seek professional advice to ensure their interests are protected. Options are by their nature complex legal agreements that often involve significant negotiation. Our Commercial Property team specialises in negotiating land option agreements, so whether you’re exploring a new opportunity or formalising a deal, we’re here to guide you through it.
If you’re needing legal advice in regards to commercial lease agreements, property development, property finance & banking, property investment & asset management or property litigation. contact our highly experienced commercial property team 0161 930 5151 or email commercialpropertyteam@gorvins.com and we will be in touch.