What is an Option Agreement?
An Option Agreement is an agreement entered into by the owner of property and a potential purchaser. On entering the agreement, it is usual for a non-refundable sum to be paid to the owner in return for a legally binding option to purchase the property either within an agreed period of time or after a specified event.
For example, a developer may be interested in purchasing a plot of land to develop but does not want to commit to the purchase until planning permission is granted as the land will have little value without such consent.
This benefits the developer as he has peace of mind that the land will not be sold to someone else until the option expires. Equally, he can walk away from the purchase if he does not obtain the required planning permission. From the owner’s perspective, even if the developer does not go ahead with the purchase, he will usually be entitled to keep the option fee already paid.
What is an Overage Agreement?
An Overage Agreement is where land is sold on the basis that if conditions specified within the agreement occur, the seller is entitled to an additional sum of money or an ‘overage payment’.
For example, a developer has purchased plot of land ‘A’ for which planning consent for development has already been granted. The developer now wishes to purchase a neighbouring plot of land ‘B’ for which planning permission is yet to be obtained.
However, the developer requires plot B, whether or not planning is granted, as in the absence of planning it will still be of use as access to Plot A. The developer will however be unwilling to purchase plot B for the same value if planning permission has not been granted as he would if planning had already been obtained. The owner will also be unwilling to sell plot B for the value of the land without planning, knowing of the possibility that planning permission will be granted in the near future, later increasing the value of the land.
One way to satisfy both parties is to enter an overage agreement whereby plot B is sold at the current value in the absence of planning permission with the condition that on the grant of planning permission, the developer must pay an agreed additional sum to reflect the increase in value of the land.