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Selling land to a developer
With the ever increasing demand for property, some landowners are considering selling some of, if not all of their land to a developer.
An option agreement is a legal contract that gives a developer the right to purchase land or property from a landowner. Option agreements are often agreed to be within a specific period of time at a certain price.
Is an option agreement legally binding?
An option agreement only becomes legally enforceable once both parties agree and the seller accepts an offer. Once the seller accepts a given amount of money from the buyer, within the designated time of the contract, then the contract becomes legally binding.
How long does an option agreement last?
Generally, an option agreement will last from 3-5 years, however this is dependent on whether both the buyer and seller agree on a different timespan. Some agreements include the right to extend the time frame, buyers can do so by paying an additional fee to the seller.
An extension may be considered in times of uncertainty, or other external factors that affect the purchasing of a property (such as COVID).
Pros and cons of option agreements
How does an option agreement benefit a land developer?
An option agreement often ties the seller but does not tie the buyer, meaning the buyer has the freedom to decide whether or not they wish to purchase without having to provide a reason.
For this reason, option agreements are a desirable and flexible instrument for a buyer.
How does an option agreement benefit a landowner?
On the flip side, it also enables landowners to increase the market value that is achieved through development, without risking the substantial cost of obtaining planning permission.
What are the disadvantages of option agreements?
Disadvantages of option agreements for landowners
The main disadvantage of option agreements for sellers is that there is no guarantee of sale, seeing as the buyer only has the option to buy. In addition, the property will not be put on the open market for third parties to make offers. Meaning that the landowner may receive considerably less from a developer.
Lastly, when a developer places an option agreement over a property the landowner may lose control of the land seeing as it is tied up by the developer. Some developers may deliberately 'tie-up' specific land, only to see that their competitors can't purchase it. This obviously has a negative impact on the seller, as it makes it difficult for them to try and sell elsewhere.
Disadvantages of option agreements for developers
As for developers, one disadvantage is that they generally have to pay the costs and spend the time gaining planning permission. However, in some option agreements there may be an agreement that the costs of planning permission is to be deducted from the price, thus preventing a developer over-spending.
It is important to understand what you're entering into with an option agreement, for both buyer and seller. It is always best to contact a solicitor before entering an option agreement, you can book a free chat with one of our specialist solicitors here.
How to negotiate an option agreement
It is important to establish at the outset the key terms of any proposed deal and a commercial property solicitor can assist with this.
Examples of things to consider include whether a non-refundable option sum is to be paid on the granting of the option; who will cover legal costs; how the final purchase price will be calculated; any restrictions on development e.g. if a landowner is selling part of their garden to a developer they may want to limit what is built; any uplifts in payment due to the landowner dependent on how many additional units are secured through planning.
A conditional contract sets out specified conditions in which both parties are bound to from the outset. Formal completion is linked to the satisfaction of the condition.
Therefore, a conditional contract provides the seller protection by preventing the buyer walking away if the condition is satisfied.
Selling land with a conditional contract
A developer might enter into a conditional contract with the landowner either to buy or lease the site at a future date. The conditions might include, for example, the developer obtaining the required planning permission and a grid connection offer.
When the developer has obtained the necessary planning permission, meaning the contract is no longer conditional, the developer might be obliged to purchase / lease the site.
What is the difference between option agreements and conditional contracts?
A conditional contract is generally more formal than an option agreement. The terms of the option agreement could be principally the same as a conditional contract, but an option agreement will usually give the developer the right to terminate the agreement at any point.
Even if the developer has all the necessary consents required to develop the site, the developer would not be obliged to exercise the option. So, the option agreement route can give developers more flexibility than entering into conditional contracts.
Pros and cons of conditional contracts
How does a conditional contract benefit a developer?
The buyer is only enforced to purchase once the condition is met. This means that the buyer will not be obliged to complete purchase if the condition is not satisfied in time. Thus preventing developers paying the cost of purchase if they are not convinced that the condition has been met.
How does a conditional contract benefit a landowner?
One benefit for the seller is that there is security within a conditional contract as the buyer is bound to pay once the condition has been satisfied. In addition, if the condition of the contract is met, they could potentially receive a higher payment than if a option agreement was used.
Another benefit for landowners is that they can include certain conditions within a conditional contract, such as a non-refundable deposit or a 'long stop date'. A 'long stop date' is a fixed date by which completion must take place. If this doesn't occur the contract may become null and void, preventing a huge delay for the landowner.
What are the disadvantages of conditional contracts?
One disadvantage of conditional contracts is that if the conditions are not clearly set out then there could be issues for both the buyer and seller. If the respective parties do not clearly identify the criteria, then the deal could fall through.
Disadvantages of conditional contracts for the landowner
A potential disadvantage for the seller is that the conditions within the contract may actually reduce the purchase price. If the developer wants to save money, they may have the condition that the planning permission costs are subtracted from the purchase price.
If the seller has not fully understood the contract they will have to, in this situation, either accept the reduction or pull out of the deal. Sellers are also are bound to sell the land once the condition is met.
Disadvantages of conditional contracts for the developer
As for the buyer, they have to purchase the land once the conditions have been met. In addition, they may have to pay extra costs outlined by the seller in the contract.
For both buyers and sellers it is important to clearly identify and understand the terms in a conditional contract, otherwise the deal could end negatively for either party. It is best practice to consult a solicitor before entering a conditional contract, you can book a free chat with one of our specialist solicitors below.
Solicitors for selling land to a developer
At Frettens, our specialist commercial property team is one of the best-resourced and most experienced in the area, and are recommended in the Legal 500 guide.