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Option Agreements and Contracts Subject to Planning Explained

In the first of two articles, Commercial Property expert, Simon Stempien looks at the property development options available for landowners who have land capable of being developed.

In the South East of England we are fortunate that there remains, even in the current climate, a strong demand for houses. The demand for houses means that large scale developers continue to look to our region to see if there are development options but we also see that the potential for smaller developments also remains strong. This means, if you are fortunate enough to have land capable of being developed, you may want to consider what options are available to see if you can realise some extra money from your property. In this series of articles we will discuss some of the main forms of contracts in developments.

Whether you have space for a single dwelling, whether you and neighbours want to work together to see what is possible, or whether you have a number of acres, we can help. We have acted for numerous Land owners and Developers and can help with any size of development.

In this first of two articles we will look at Option Agreements and Contracts Subject to Planning, and in the next article we will discuss Promotion Agreements and Overages.

Option Agreement

There are a number of different forms of Option Agreement, and we will discuss here the Developer 'Call Option' Agreement. This is often seen as the most 'developer friendly' option as the power to make decisions remains with the Developer. An Option Agreement creates a period of time in which the Developer can opt to purchase the property but it is never under an obligation to do so. At any point in that Option Period the option can be 'exercised' and the property will be sold. This means that the Property becomes somewhat ‘burdened’ by the option during the Option Period, as the option continues to be in place without any certainty that it will be exercised and that may limit the current owner’s ability to do what they want with the Property. For example, a second developer may offer preferential terms after the first option is created.

An Option Agreement may state that a Developer needs to seek planning permission for a development but that is not present in every Option Agreement. Options therefore tend to be useful for a Developer if the development is larger and there are a number of stages and risks to overcome before Planning Permission is obtained or is likely to be obtained. As always there are a number of factors that need to be considered when entering in to these agreements:

  1. How long is the Option to Last? We have seen Options of less than a year and some which have been 10 years or more. Please note that the option can be extended by agreement between the parties. If planning is discussed in the Option, the option can also include a system to have the Option Period extended whilst planning appeals are resolved.
  2. Is the sale price to be set at the start of the Option or will it be the 'open market rate' at the time the Option is exercised? Land values have dramatically increased and setting a low price at the start may mean that the Developer may become very lucky if prices increase past that set level. That being said, there may be significant arguments about the value of the market value.
  3. Is there to be an initial fee paid by the Developer? Depending on what is agreed, that original fee may remain with the current owner if the Developer did not exercise the option. Depending on the size of the development we often see initial sums being minimal as the Developer does not want to risk substantial sums of money.

Commercial Property team

Contracts Subject to Planning (CSTP)

Unlike an Option Agreement, a Contract Subject to Planning (CSTP) states that if certain conditions are met, the Developer will purchase the Property. A Developer is therefore more likely to offer this structure if they have a settled decision to purchase the Property. That being said, we do see CSTPs being used for small and large developments.

Given completion is dependant on Planning, CSTPs focus extensively on that planning process and the only real difference between a normal ‘simple’ contract and CSTPs is that Planning Permission needs to be obtained. There remains a risk for a Developer given they are agreeing to purchase a property before planning is obtained. Therefore there is no guarantee as to the exact form of permission that will be obtained and as a result CSTPs contain a system for a Developer to state whether the Planning Permission obtained is 'satisfactory' to them. If the Permission obtained is not satisfactory, the purchase does not complete or, as described below, an appeal may be required. The contract will normally state what reasons a permission may be classed as 'unsatisfactory' and can be as a result of a permission requiring significant additional expenditure on the Developer or for the need for a number of houses which result in the overall profitability of the development to be significantly affected.

Unlike some Option Agreements, CSTPs can be very detailed and can clearly set out the obligations of each party in respect of planning from the moment that the Contract is created. This means that it can state when a Planning Application must be submitted by the Developer and whether the Current Owner has any say in the permission being sought. It can also state whether Developer needs to appeal if permission is not initially granted or whether the Permission obtained is 'satisfactory'.

Often CSTPs last a much shorter period of time as completion of the purchase relates to Planning Permission. Therefore if planning happens easily and quickly, the purchase may complete quickly. Detailed sections of the contract also states what happens to completion if a planning appeal is submitted and how the period for the Developer to purchase the Property may be extended. It may be everyone’s plan that the purchase is to complete within a year, but if planning issues arise the CSTP can explain how that can be extended to cover the unexpected need for appeals. It is important that there is a ‘long stop’ to make sure that the process of multiple extensions does not mean that the sale can take decades and gives both parties some finality.

As a contact is created a deposit may be payable by the Developer. Whilst a developer may not want to pay a normal 10% some form of reduced deposit may be paid. Even when a deposit is paid, the contract may state that if planning is not obtained the Developer may have the deposit repaid to them.

For advice on this and other commercial property issues, please contact one of our Commercial Property specialists who will be happy to help.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

Before relying on this commentary please read the Reliance on information posted section in our Terms of Website Use in our Legal section. Please note that specialist advice should be taken in relation to any specific queries and the information above is provided for general information purposes only.

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Our Experts

Jeremy Burke

Head of Department
Commercial Property

David Redgate

Commercial Property

Simon Stempien

Commercial Property

Sophie Robins

Commercial Property

Usman Miah

Associate Solicitor
Commercial Property

Thomas Picknell

Assistant Solicitor
Commercial Property

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