An option agreement is a set of terms and conditions between contracting parties which contains a provision to allow (but not oblige) a party to purchase, sell or otherwise gain a product at a certain price at a certain period of time.
Share Option Agreements
Commercially, such agreements are often used when dealing with shares. A share option agreement gives the recipient the option to purchase the shares at a pre-determined price on or after an agreed date.
This is beneficial as it means that the recipient will be able to benefit at the price agreed even if the price increases between the time of the agreement and the time of purchase. This type of agreement is often used with employees, and is seen as a highly desirable benefit as they are not subjected to a cost upfront and such schemes are often tax efficient. Further, employees can often choose to exercise their right when they have the means to do so and when they believe it is financially beneficial to do so.
Property Option Agreements
Perhaps the most common use for option agreements is in relation to the purchase of property or land. Option agreements may be used to help in either a commercial or residential situation where the buyer is given the option to purchase a particular piece of land or a property. This option will be available to a certain time period and be subject to the specific terms of the option agreement.
Such agreements are often used for vacant property or land, or perhaps because the buyer requires time to raise the funds, carry out more research or obtain planning permission.
An example of a property option agreement is where a buyer is interested in a piece of land that they are interested in turning into a new development of flats. In its current state, the land may be worth only £50,000.00. However, if the land has planning permission for residential property, the land may be worth £500,000. In such a situation, an option agreement may be of interest as it should ensure that the seller has reason to push ahead with a planning application and the buyer may have the flexibility to proceed or not at a specific price if planning is granted, in a situation where planning permission may be granted with conditions which make it unclear whether the land may be worth the full £500,000.00 or not. In other words, such agreements are useful in situations where there is an attractive possibility but with certain unknown contingencies that may make a conditional contract too uncertain or risky for one or both parties.
Although each type of option agreement differs and will be dependent on the particular facts and purpose of the agreement, there are a number of common clauses that should be considered when drafting option agreements. Typically important considerations are :-
- Timescales and expiry of the option
- Any premium payable for the option by the buyer
- Commitments by the seller to undertake certain tasks that may be necessary to create conditions where the option may be exercisable
- Whether or not the option can be sold or transferred (assigned) to a 3rd party
- Possible warranties being provided by either party.
I have dealt with many option agreements and can offer a fast appraisal at no charge of whether an option agreement suits your needs. Get in touch with me to discuss further.
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