The Power of the Option Agreement
Our previous note focused on how property developers could place themselves in prime position once lockdown has lifted and the market has come back focused on feasibility for airspace sites.
Now we’re going to deal with option agreements.
If, through proptech or other means, you’ve identified a great site you like while working from home during lockdown how do you then secure that site without having to do the due diligence that would require your attendance at the site, having funding streams in place or, indeed, requiring you to leave the house?
There are a couple of avenues open to the housebound property developer:
Exclusivity Agreement
The exclusivity agreement requires the seller not to market the property to any third parties, not to enter into negotiations with anybody else and not to send any documents or information out to any third parties for the duration of the agreed exclusivity period.
This gives a developer time to
- Wait for the market to come back; and
- Give a limited amount of security that the seller will not sell the land to anybody else while the developer is waiting.
Exclusivity agreements can also require the parties to carry out certain obligations during the exclusivity period, for example, for the seller to provide pertinent document and information relating to the property and for the buyer to carry out due diligence (although that would be limited in the present circumstances).
The downside of exclusivity agreements are that if the seller decides they don’t want to sell, practically, all they have to do is let the exclusivity period run down and then they can sell to who they want. A developer cannot compel the seller to sell under an exclusivity agreement.
Option Agreement
An option agreement can take many forms, but for our purposes we’re taking it that the developer and the seller agree that during an agreed option period the developer can require the seller to sell the property to the developer.
Option agreements can be very flexible and can, for example, make provision for the price of the purchase to be determined by valuation at the time the developer serves notice on the seller requiring the seller to sell the property to them, which greatly assists in a market where marking valuation is presently a problem.
It also gives the developer a period within which they can carry out their due diligence and, helpfully, there’s no obligation on the developer to buy (in the example we’ve given).
Further, as the option agreement is a property contract it can be noted against the Land Registry title or, if it’s agreed by the seller, a restriction placed on the title preventing sale to a third party.
Secure Sites
Although we’re in lockdown there are still steps developers can take to lockdown the sites they like for minimal legal spend. We offer fixed fees for all exclusivity agreements and option agreements, and for exclusivity agreements, we also offer to provide a service where we will create bespoke exclusivity agreements that you can take away and use in all your legal projects, so you would never need to ask your solicitor about it again!
For more information on our airspace offering or any of our property development expertise, please contact our Commercial Property Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be in touch.