With the rate of building now likely to plateau later in 2015, developers may now be looking for new projects and to rebuild their land banks. Many will want to hedge against the peaks and troughs of a volatile market by taking options on possible development sites.

Rebecca Keyshan of Artington Legal looks at important issues in an option agreement for developers.

Identify the Owners

Land may be owned by several parties or in several parcels. Tying up the owners can be like herding cats, but it is vital that all are brought under one option agreement. This reduces the risk of one holding out for a better deal.

Who is the ‘developer’

Are you going to create a special purpose vehicle to hold the land? Consider rights of assignment of the agreement and the right to charge the option. You may need to move the option around the corporate group or grant a charge over it to secure early funding.

Planning

Make sure you control the planning process. Ensure that the landowners take no steps to stymie your planning scheme or impose onerous conditions. Consultation rights may be appropriate, but ensure each owner undertakes that they will not oppose planning. Build in appropriate extensions to the option timetable in case you have to go to appeal. Ensure that you can get the landowners’ participation in any Section 106 or similar agreements.

Covenants and rights over the land

These are often overlooked. Without good due diligence, you can see your profits squeezed through having to make payments to release covenants or alter easements.

Price

Pricing structures can be a single option payment through to complex structures reflecting milestones such as planning and overage (effectively a share in super profit). Consider how the land is valued after each of these events. Should you restructure the payment if there are unforeseen delays or issues?

Enforceability

Options should be registered at the Land Registry to get the maximum protection against third parties.

Environmental costs

Who will pay the clean up costs of any environmental problem? Are you going to require the land-owner to contribute? This is of particular importance when dealing with brownfield sites, former petrol stations and redundant utilities sites that are often conveniently located for development.

Owner’s activities

Restrict what the owners do with the site pending getting planning permission. You should consider restrictions on use. You should also consider who insures the land and any buildings works during the option period.

Confidentiality

You need to protect the commercial information in your agreement. You do not want other owners of target land finding out what you may be prepared to pay thus inflating prices.

Not every issue in an option agreement is mentioned here. Even the most astute and experienced developer can overlook these points when settling the basic option terms.

If you would like more information about option agreements or other real estate issues, please contact our Commercial Property team – [email protected] and we will happily help you.

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