A landowner may incur a capital gains tax liability because an option is treated by law as an asset sold in exchange for the amount of the option. If the developer does not obtain the necessary building permit for the development of the plot, it is unlikely that the developer will exercise the option, and therefore the sale of the land would not continue. Option agreements allow developers to consider the possibility of acquiring land for eventual development without being required to do so, and give the developer peace of mind that if they spend significant amounts of money to obtain the building permit, they can buy the land and not lose their financial investment. An option contract also allows a developer to exclude others from the purchase of the land for a defined period of time. Therefore, the option period and the option fee should be taken into account, among other things, in order to mitigate these risks. If the landowner and option holder cannot agree on a purchase price, the agreement should include provisions on how to resolve the dispute. This usually involves the appointment of an independent expert or a duly experienced arbitrator who is also a licensed surveyor. The expert may be agreed between the parties or appointed through the RICS. The most common form of option agreement (known as a “call option”) is useful for a developer to explore the feasibility of potential development. Once the land has been developed, it will have an increased market value, and so landowners may also want to think about mechanisms by which they can share the developer`s profits or increase the value of their land even after it separates.
This is called an overtaking agreement. Often, the developer can exercise his discretion against the payment of an option sum if he wishes to acquire the property. The developer can then apply for a building permit because he knows that if the construction application is not accepted, he is not obliged to buy the land, but that if the development is granted and produces a viable project, he has the opportunity to acquire the land under known conditions. The expert must then determine the purchase price, with the option holder then being able to decide whether or not to buy the property at a fixed price. Land has a higher market value after the construction of a residential building. Often, in addition to the option agreement, an overrun agreement would be negotiated, so that if the property increases significantly in value after development, the seller can receive an additional payment after completion, which is calculated on the increase in value. It should be remembered that the conclusion of an option contract does not necessarily guarantee a sale at the end of the option period. This could be considered risky for the landowner, as they will enter into an agreement for an often lengthy period of time that will prevent them from selling the property to another interested party without the guarantee of a sale at the end of the option period. Most often, option contracts used in the real estate development industry are purchase options. The owner of the property sells the right to buy the building or land to the potential buyer. It is then up to the buyer to choose whether or not to exercise the option and buy the property. The owner of land or property is required to sell if the buyer of the option exercises his right.
Option agreements and overtaking agreements can be positive for both the landowner and the buyer, but there are potential pitfalls that require careful navigation. If you need advice, please feel free to contact a member of our commercial property team. The purchase price mechanism typically reflects a discount percentage relative to the market value at the time of exercise, which often includes additional deductions for option fees and planning promotion costs. The price agreement process can be difficult because there is no transaction where the market value is determined by competing bidders in the open market. The terms of the option agreement could in principle be the same as for a conditional contract, but an option contract generally gives the developer the right to terminate the contract at any time. Even if the developer has all the necessary consents for the development of the website, he would not be obliged to exercise this option. The option agreement route can therefore give developers more flexibility than entering into conditional contracts. However, to protect yourself, you must have a watertight written agreement. This is especially important for an option contract, as the option holder often takes steps to commit to the purchase or increase the value of the item. Either way, the seller would be tempted to change the terms if you hadn`t tied it! Our team is adept at handling all the different aspects of creating and advising on option agreements and we are here to help you in any way possible. We are able to clearly explain legal issues and provide open, honest and professional advice.
An option that gives the buyer of the option the right to purchase an asset is a call option. Unlike a call option, a put option does not create interest in the land and therefore cannot be registered with the land registry. The asset of the option is called the underlying asset. Generally, written submissions detailing market-based evidence and valuations used to support the valuation of market value and purchase price are submitted by the landowner and option holder to the appraiser for review. It is then generally possible to give the expert cross-representations based on what the other party has submitted in its written submissions. A well-designed option agreement can be a convenient way for landowners to make their land available for development and reap the benefits without having to be directly involved in planning or construction. The first step is a general cost-benefit assessment. There should be enough total profit (after taxes) to pay for your work and entice the landowner to sell you a call option.
For a free initial consultation on how we can help you with the legal aspects of creating an option contract, contact us today. We will review your situation and discuss your options in a clear and accessible manner. Early legal assistance from experts can help avoid the stress of dealing with these issues yourself. Simply call us on 0345 901 0445 or fill out our online application form and a team member will get back to you. A call option other than land or financial instruments is a transaction that you can trade without interference from the law. You can buy an option to buy a domain name, patent or car under any conditions. The law states that the acquisition of an option to purchase land is in itself a land transaction – meaning that a developer must comply with the SDLT requirements for the option and any subsequent transfer of the land if the consideration paid for each part of the transaction is above the reportable level (currently £40,000). A developer should also be wary of any impact on VAT by ensuring that the amount of the option is either included in VAT or exclusive and that the VAT treatment of the property is known from the outset and that guarantees are given that this will not be changed by the property owner during the option period.
Owning and buying a put option would allow you to take advantage of a falling market. The landowner may require the developer to pay an option fee in exchange for the right to exercise the option. These fees would be retained by the landowner, whether or not the option is actually exercised. The option fee is an additional sum to the purchase price to be paid for the property in the subsequent exercise of the option. A developer may be able to agree on the purchase price with the landowner at the beginning of the option agreement. This means that the initial cost is safe and the developer can pay less than the market value. Often, however, each price is subject to the deduction of unforeseen costs. The real estate market has experienced ups and downs over the past 10 years. An option contract does not guarantee a sale. When entering into an option agreement, the landowner often has to provide the developer with a standard guarantee, which means that the seller cannot sell the property to a third party without restriction during the period agreed in the option.
The disadvantage for the seller is that if the developer does not obtain a building permit and withdraws from the option, the purchase will not take place. Another form of option agreement (known as a “put option”) can also be used, giving a landowner the option to force a developer to buy the land. The landowner may be required to pay the developer an option fee, but there is no obligation for the landowner to sell the land. An option contract is only binding on the seller – because the option holder may choose not to exercise it. If the holder does not exercise it before the last exercise date, he expires and is dead. It follows that it is very important to use a contract that is as comprehensive as possible. .