What is a Land Option Agreement? ⏳

In the simplest terms, think of a land option agreement as like a ‘wait and see’ deal for land.

Most importantly, the agreement is structured in a way to incentivise both parties.

Do I Have To Buy The Land?

No, you do not have to buy the land in an option agreement. 

In this agreement, the buyer gets the exclusive right, but not the obligation to buy the land during the option period, usually ranging from 6 months to a few years. 

This means the seller legally can’t entertain other offers during this time and is unable to sell the property to anybody else while the land option agreement is active. 

However, the buyer can choose not to proceed with the purchase if they change their mind or encounter unforeseen issues.

Remember that you have the exclusive right, but not the obligation to buy the land at the agreed price. 

This means that if the option period expires then the seller can just look for other buyers and the buyer can look at other opportunities.

Payment for the Option – £1 Option Fee

To secure this exclusive right, the buyer usually pays the seller a fee, known as the “option fee” or “option premium.” 

This fee is non-refundable and is separate from the actual land purchase price. It’s like a down payment to keep the option contract open. 

In property development, this is often £1 as this is the minimum that you are required to put down legally. 

This is why you might have seen people say “I bought a house for  £1!”

Why Use Land Option Agreements?

Land option agreements are beneficial for both parties so let’s see how each side can benefit.

Why Would A Developer Use A Land Option Agreement?

A developer benefits from a land option agreement because they know that the seller won’t just sell it to somebody else and the developer can attempt to get planning permission and approvals during the option period.

This lets the developer test the commercial viability of the project without committing fully to the purchase. 

For example, if the developer bought the land outright and then tried to get planning permission for their project but failed, then that would ruin the project as they can’t add value to it like they would have liked. 

In short, for the buyer, it allows them to assess the land’s potential, conduct feasibility studies, and secure planning permissions before fully committing to the purchase. 

Why Would A Landowner / Seller Use A Land Option Agreement?

It may be the case that the landowner doesn’t have the resources or expertise to go through the process of gaining planning permission on the land to carry out any development projects.

By agreeing to a land option agreement, the developer can then carry out these tasks and add value to the land (by gaining planning permission). 

Then the landowner will typically take some of that uplift as profit. 

The way this would work is as follows…

(We are going to use very simple made-up numbers just as an example.)

Let’s say a plot of land is worth £100,000 to buy with no planning.

And if planning permission were gained for a certain project then the plot of land would be worth £140,000.

The option agreement agreed purchase price should be somewhere in between these values of £100,000 and £140,000. 

This way both the seller and buyer have an incentive to go through with the land option agreement as there is profit for both parties. 

In short, for the seller/landowner, land option agreements offer a potential sale at an agreed-upon price at a higher value than the land is currently worth without effort or investment on their part. 

Setting the Purchase Price

The purchase price is usually determined at the beginning of the agreement, sometimes known as the “strike price.” 

This price remains fixed throughout the option period, regardless of any increase in land value. 

This can be advantageous for the buyer if the land value rises significantly during the option period. I mean this is kinda the whole point of an option agreement. 

You agree on a price and aim to add value to the asset before purchasing at the agreed-upon price which should normally be:

• Below the new value (after planning gain) so the buyer can profit
• Above the original land value (before planning gain) so the seller can profit

Exercising the Option

If the buyer decides to proceed with the purchase, they formally exercise the option within the agreed timeframe. 

This triggers the land sale, and both parties proceed with the usual conveyancing process to complete the transaction at the agreed-upon price.

If the Option Expires…

If the buyer decides not to exercise the option within the specified timeframe, the agreement comes to an end. 

The seller is then free to consider other offers from different buyers.

Risks For The Buyer / Developer

Even if you have a land option agreement in place it does not mean you automatically have a home run as the developer. 

You might go through the planning process and gain planning permission…

But unforeseen circumstances can arise and costs could be much higher than expected which can make the project unfeasible. 

It could also be that you gain planning permission, but not exactly how you wanted, and this could also reduce the potential GDV of the project.

• Related Reading: What does GDV mean in property?

If these things happen it can mean that purchasing the land at the agreed-upon price is no longer worth it, so you don’t end up exercising your right to buy the land at the agreed-upon price. 

This means you’ve already spent money on the planning process and all the other related costs, but without going ahead with the project.

You’ve just had to absorb all of those costs for nothing. 

Risks For The Seller / Landowner

As we’ve just said, it may be a scenario where the developer doesn’t end up exercising their right to buy the land at the agreed-upon price.

The cost of this is that you don’t have the opportunity to market the land to other prospective buyers during the length of the option period. 

This can be especially bad if there is a falling market where land values are going down.

By the end of the option period, the land value could be lower than when you started if no planning permission was gained and the sale doesn’t go through. 

Don’t Be A Dummy

Option agreements need to be done correctly with a lawyer so that you don’t screw yourself. 

Just use a lawyer so you can protect yourself and ideally use one that is well-versed with transactions of this nature. 

Also, remember to speak to a qualified accountant so you can consider any tax implications as everyone’s situation is different.