Understanding Options

People who want to buy a property but do not currently have the means to do so, or who simply want to be guaranteed the opportunity to buy it during a specified period or at some future date, will often undertake an option agreement with the owner. Under such an agreement, the prospective purchaser enters into a contract, which normally involves the payment of an up-front charge in exchange for having the legal right to buy the property at or within some future time. Options are widely used where a purchaser wishes to purchase land only if an event (normally the granting of planning permission which the prospective purchaser undertakes to obtain) occurs.

The timing of a purchase under an option agreement can be influenced by a number of factors, so options are usually for a specified period. One common trap in these cases is that the maximum period for which such an option can legally be granted is 21 years. If the option is created for a longer (or indeterminate) period, it is unenforceable. This is so even if the option must be preceded by some event, such as the granting of planning permission. Also, an option for sale of land must be registered at the Land Registry to be enforceable.

In order to purchase the land subject to the option, the purchaser must serve on the vendor a valid notice within the specified time limit. If the option is to be exercised just before the period expires, it is advisable to ensure that proof of delivery (time and/or date stamped as appropriate) is obtained. Also, the option notice must not in any way change the subject of the notice. For example, adding an offer to purchase something attached to the land which was not mentioned in the original option agreement will probably invalidate the option.

It is especially important to make sure all procedural matters are dealt with correctly as regards the notice to exercise the option. In particular, it is sensible for the purchaser of an option to make sure that where there is a ‘trigger event’, which starts the time running during which the option can be exercised, the wording of the agreement is such that the clock starts running when the purchaser becomes aware of the event, not when the event takes place. Failure to do this could result in the loss of ability to exercise an option because the prospective purchaser is unaware of the occurrence of the trigger event.

From the perspective of the grantor of an option, it is important to get the terms right – for example, failing to put in a 'drop dead date' means the option will be valid for 21 years. In a recent case where the option lasted for a period after the end of the planning application process, when this was effectively frozen, the option continued to run, to the landowner's discomfit.

Source: Commercial Client library Content