In my last article I looked at conditional contracts and observed that no developer would want to find itself contractually bound to proceed to buy land, even though with the benefit of planning permission, if it did not at the time want to do so. Why wouldn’t a developer want to complete its purchase having spent all its time and money on getting to this point? Perhaps there could be something about the permission which makes it uneconomic or even undeliverable. The price, being a fixed amount or providing a minimum return for the owner, might no longer be justified in the market at the time. The developer might not be able to raise the finance or its sales projections from this development are slow and don’t work economically. So, you probably have a contract which looks much like an option. That is one that gives discretion to the developer to proceed or not. So why not just have an option?
An option is what it says in that it gives the developer at a given time the right to buy at a price which it can choose to exercise or not. It would be usual in development contracts for this right only to arise once a planning permission has been granted and to be for a set period following that in which the developer will have to make up its mind. As the price may be calculated based on the market value of the land with planning permission, it shouldn’t be exercisable in advance of consent unless there is a fixed price agreed at the outset. Always remember that there is no obligation on the developer to exercise the option, it can walk away or try to renegotiate.
Options, as with any contract, needs to have a date when it ends. This can be variable depending on how the planning application progresses and if an appeal is made against a refusal or unacceptable condition attached to a consent. The owner needs to give sufficient time and the developer will want as much time as it can negotiate. The owner will want obligations on the developer to work consistently towards the grant of a permission as they would not be well served tying up their land for years with no activity towards the final objective of a sale. The developer might want to be able to call it a day early on where it looks like further expenditure will be wasted.
The developer will want the window of opportunity to exercise its option to arise only after it achieves a planning permission which it deems satisfactory. It could be that a consent is obtained but will be subject to an application to amend its terms or an appeal to change its conditions. The developer doesn’t want to be forced into making its decision before it is ready.
As with a conditional contract, where the price is based upon an assessment of market value, there is scope for dispute. It is usual for the developer to be required to give its own assessment of value and its calculation of the price based on a formula in the option which the owner may then challenge. The option will have a clause which states how any dispute is to be settled, usually by an expert whose decision is final which would include determining the price. Usually, the uncertainty of the outcome of this process encourages the parties to come to an agreement between themselves. Protection can be given to the owner at the outset by the setting of a minimum return, which often turns out to be what they get.
Both options and conditional contracts have inherent areas of potential conflict between owner and developer. Do all arrangements between owner and developer inevitably have to have these tensions? There is another approach which I will deal with in the next article, being a promotion agreement.