Option Agreements - Considerations for Property Owners

An option agreement is a contract between a residential or commercial property owner and a prospective buyer that grants the buyer the option to purchase the property within a set period, usually at a certain price. The buyer is not usually obliged to proceed with the purchase of the property if they decide that they do not wish to do so.

Option agreements typically last between 3-5 years, meaning property owners can be prevented from selling the land to anyone else for long periods, and agreements can also include the right to extend the time. Long extensions can be burdensome on the property owner, particularly when there is no sale guarantee to the prospective buyer who has tied up the property.

Property owners should seek legal advice if they are approached by a prospective purchaser proposing to enter into an option agreement. Purchasers are often willing to pay for the property owner’s legal costs to incentivise them to enter the deal.

Key points for consideration include:

1. How long will the option agreement be valid for (option period)?
2. Is any consideration being paid in exchange for the grant of the option (commonly referred to as an option fee)?
3. As property prices fluctuate with time, will the purchase price be fixed, or should there be a mechanism for calculating the purchase price later, for example, by reference to increases in the Retail Price Index?
4. If the property is mortgaged, will lender consent be required before the option agreement is entered?
5. Does the prospective buyer need to apply for planning permission concerning the property, and what rights of access and investigation might they require in connection with this?  
6. Will either party be able to terminate the option agreement during the option period, and what would be the relevant trigger events?