Developers’ Agreements

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Connie Moulding, Solicitor

Standard contracts for the sale of land and property include provisions that protect both the buyer and seller, whilst ensuring that they achieve their mutual goal of completing the sale and purchase. However, in some situations, standard contracts are not suitable for the transaction that has been proposed, and in fact, the contracts need to be drafted differently to reflect the intention of the parties.

If you are intending to purchase land or property and have discussed bespoke terms or conditions, it may be that a Conditional Contract or Option Agreement would be more suited to your transaction. There are material differences between a Conditional Contract and an Option Agreement, and this is explored further below.

Conditional Contract

A conditional contract is usually drafted to state that completion takes place on the occurrence of a triggering event – the buyer or the seller, or both, may have to actively take steps to ensure that something is done, and the contract is conditional on that basis. The parties would agree the mechanics of the proposed deal, including the specific details of what the conditions of the contract will be, and what has to happen prior to completion. Once that has been agreed, the contract is exchanged, and the parties are committed to the transaction.

A common condition for development land and property is often the grant of satisfactory planning permission, either to be obtained by the buyer or the seller. The is usually when the work begins, particularly for the party who is obliged to apply for the planning permission as they will want to ensure that the conditions for completion of the contract are fulfilled. Landowners and developers must be very clear on what the extent of that condition entails, including the time limits for applying for planning permission and what constitutes a satisfactory planning permission to trigger completion of the contract. For instance, there may be a requirement to enter into a section 106 Agreement in support of the planning permission, or certain elements may be subject to review or appeal.

Similarly, a buyer might be proposing to purchase a property for a specific use, such as a House in Multiple Occupation (HMO) but although the property has been used in that manner for some time, it doesn’t have express planning permission to be as such. In that case, the seller might agree to obtain a Certificate of Lawfulness of Use, to regularise the position and provide evidence from the local council that the property is permitted to be used as an HMO. The contract may therefore be conditional on the seller obtaining the Certificate.

Once the condition is satisfied in accordance with the terms of the Contract, this will trigger completion, usually within a certain time period such as 10 working days. In effect the contract then becomes unconditional and the parties are obliged to complete. We would expect that the contract be drafted include a termination clause, whereby if the condition is not met within a defined time frame then the contract is terminated. However, if the condition is satisfied but one party does not complete, they would be considered in default of the contract and liable for enforcement of the breach.

Option Agreement

In comparison to a conditional contract, an option agreement is a contract that gives a developer the right to purchase land or property from a landowner at an agreed price within a certain time period once the terms of the agreement have been met. Like the conditional contract, the option agreement often is based on the developer seeking to obtain planning permission for development. There is often quite some time during the agreed ‘option period’ in which the developer applies for the planning permission, but this can be of benefit to the landowner as they don’t have to go through the process themselves of obtaining the planning permission.

The benefit of exercising the option lies with the developer, as the agreement would give them the right to complete on the purchase of the land once the planning permission has been obtained. However, they don’t have to do so if they choose not to. Therefore, unlike a conditional contract, the agreement does not become unconditional and binding on the grant of the planning permission – the agreement may fall away if the developer does not want to complete for whatever reason. This does pose a risk for the landowner as there is no guarantee that the land or property will be sold at the end of the option period. But, they have not had to go through the process and cost of obtaining the planning permission, and usually an option fee is payable in addition to the purchase price when the option is exercised. 

Usually the existence of the option agreement is noted on the landowner’s title to the land or property at Land Registry. The intention is that the landowner cannot then sell the land or property to a third party without the knowledge of the developer, and a new owner would be bound by the option agreement.

There are clear differences between conditional contracts and option agreements, which may make one more suitable for your proposed transaction than the other. If you would like to discuss this further, please do not hesitate to contact our Investment Property team.