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.
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 property situation where the buyer is given the option to purchase a particular piece of land or a property. This option will typically be available for a certain time period and be subject to other specific terms of the option agreement.
Such agreements are often used for vacant property or land and for potential property development projects, or perhaps because the buyer requires time to raise the funds, carry out more research or obtain planning permission.
Types of property option agreement
The 3 most common mechanism clauses used with option agreements for property :-
- Call option – in this situation the buyer has the right (but not obligation) to go ahead and buy.
- Put option – here it is the seller who can decide to proceed and compel the buyer to complete the purchase if the option conditions are met.
- Cross option – gives both buyer and seller the same rights.
Option Agreement conditions example
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 £500,000.00.
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.
Option 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.
Main clauses in an Option Agreement
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 exercised;
- Whether or not the option can be sold or transferred (assigned) to a 3rd party;
- Possible warranties being provided by either party;
We deal regularly with 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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